Employer to now seek employee’s choice about new or old income tax regime

An employer will now need to seek information from employees on whether they will for new Income Tax regime or old regime, the Central Board of Direct Taxes (CBDT) said in circular .

The new Income Tax regime, amended with effect from fiscal year 2023-24 (Assessment Year 2024-25), has now been made default option for the taxpayers.

The CBDT “directs that a deductor, being an employer, shall seek information from each of its employees having income under section 192 of the Act regarding their intended tax regime and each such employee shall intimate the same to the deductor, regarding his intended tax regime for each year and upon intimation, the deductor shall compute his total income, and deduct tax at source thereon according to the option exercised.”

Decoding the circular, Sandeep Jhunjhjnwala, Partner with Nangia Andersen LLP says it clarifies that the employer needs to seek details from the employee on intended income tax regime and accordingly deduct tax at source. If intimation is not made by the employee, the default option of new tax regime could be presumed by the employer. However, it is possible that the employee intimates the employer on opting for new income tax regime and later files income tax return as per the old tax regime or the other way round.

“Compared to similar circular in 2020, the distinction with current circular are presumption of new tax regime if not specifically opted by employee and mandatory requirement for employer to seek detail of intended tax regime from employees,” he said.

More clarity

Om Rajpurohit, Joint Partner with AMRG & Associates says CBDT’s circular provided a much-needed clarification from the standpoint of both employer and employers. First, it will relieve the employee from the burden of selecting the appropriate regime at the very beginning of the year, thereby, allowing them to select the best option based on specified exemption and deduction later on. Second, “it has been clarified that the default mode will be used if the employee doesn’t provide any information about the regime option, this will greatly protect the employer from TDS default litigation,” he said.

The new circular will replace the existing mechanism where an employee is supposed to inform the employer about intention to opt for the new Income Tax regime for each previous year and upon such intimation, the employer compute his total income, and make TDS. If such intimation is not made by the employee, the employer shall make TDS based on old regime.

The new Income Tax regime, introduced in 2020, saw significant changes in this year budget. The first change is that those earning up to ₹7 lakh will not have to pay tax in the new regime. Earlier, this limit was ₹5 lakh and it was the same for old regime too. Then, in the amended system, number of slabs were lowered to five from six. Another change is related to standard deduction. The salaried class and pensioners, including family pensioners, will now have the benefit of standard deduction to the new tax regime.

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