New directions on tax regimes for employers by CBDT

Employers are mandated to obtain information on preferred tax regimes for individual taxpayers by the income tax department.

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The Income Tax Department has mandated that employers obtain information from their employees regarding their preferred tax regime for the current fiscal year and deduct tax deducted at source (TDS) accordingly. If the employee fails to inform their employer about their preferred tax regime, the employer must deduct TDS from their salary income according to the revised tax regime introduced in Budget 2023-24.

Individual taxpayers have the option to choose between the old tax regime, which provides deductions and exemptions, and the new tax regime, which offers lower tax rates but without exemptions. The revamped concessional tax regime has been made the default regime for individual taxpayers to encourage them to switch to the new tax regime. Those who do not select a preferred regime will be enrolled into the new tax regime.

The Central Board of Direct Taxes (CBDT) has clarified that employers must seek information from each employee regarding their intended tax regime, and the employee must inform their employer of their intended tax regime for each year. Upon intimation, the deductor (employer) shall compute the employee’s total income and deduct tax at source according to the option exercised. If the employee does not notify the employer of their preferred tax regime, it will be presumed that they will continue to be in the default, new tax regime.

Under the new tax regime, there will be no tax for those with an annual income of up to INR 7 lakh, and a standard deduction of INR 50,000 has also been allowed, with the basic exemption limit hiked to INR 3 lakh. If your income falls between INR 3-6 lakh, it will be taxed at 5 per cent. For those with an income between INR 6-9 lakh, the tax rate is 10 per cent. The tax rate increases to 15 per cent for those earning between INR 9-12 lakh and 20 per cent for those earning between INR 12-15 lakh. Income above INR 15 lakh will be taxed at a rate of 30 per cent.

The old tax regime, which allows for exemptions and deductions, has a basic exemption limit of INR 2.5 lakh, and those having an annual income of INR 5 lakh do not have to pay any tax. Income between INR 2.5 lakh and INR 5 lakh attracts a 5 per cent tax, while that between INR 5 lakh and INR 10 lakh is levied with a 20 per cent tax. Income above INR 10 lakh is taxed at 30 per cent.

The CBDT has responded to worries about TDS on a person’s salary income under section 192 of the Act. The issue arose due to the employer’s inability to determine if the employee would opt-out from taxation under section 115BAC of the Act. Even after intimating their employers, employees can choose the tax regime they want to be in at the time of filing their return. In the event that an employee fails to provide information regarding their preferred tax regime, the default mode will be applied. This measure is intended to protect the employer from any potential litigation regarding Tax Deducted at Source (TDS) default.

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