The CBDT typically issues a circular on TDS from salaries for employers after the Finance Bill receives the President’s assent and is notified.
The July 2024 Budget introduced significant changes to the income tax laws under the new tax regime, making it more appealing than the old regime. These changes include revised income tax slabs that lower the tax payable, an increased standard deduction of Rs 75,000, and a higher deduction of 14% on employer contributions to the NPS account under the new regime.
However, these adjustments came nearly four months into the financial year 2024-25. By April, salaried individuals had already informed their employers about their preferred tax regime for TDS (Tax Deducted at Source) calculations. Employers typically require employees to make this choice at the start of the financial year, as it directly impacts how TDS is calculated and deducted from salaries. Most employees based their choice on the tax slabs available under the old and new regimes at that time.
The modifications in the new tax regime introduced in July 2024 may have altered which tax regime is now more favourable for some employees. Those who initially chose the old tax regime might now prefer to switch to the new regime due to potentially lower tax liabilities under the revised slabs. Switching regimes could result in reduced TDS from their salaries if the new tax regime is more beneficial for them.
A similar situation arose in Budget 2023 when changes were made to the new tax regime. The impact of those changes was evident in the income tax return filing figures for FY 2023-24. According to a press release by the income tax department dated August 2, 2024, over 7.28 crore ITRs were filed for FY 2023-24, with 72% of taxpayers opting for the new tax regime, while 28% remained with the old regime. The recent changes in the July 2024 budget are expected to encourage even more taxpayers to choose the new tax regime for the current financial year.
Since FY 2023-24, the new tax regime has been the default option. This means individual taxpayers must specifically opt for the old tax regime if they wish to claim deductions under Sections 80C and 80D, as well as exemptions like House Rent Allowance (HRA) and Leave Travel Allowance (LTA), to reduce their tax liability. If an employee does not inform their employer about their preferred tax regime, the employer is required to deduct TDS based on the new tax regime by default.
In April 2023, the Central Board of Direct Taxes (CBDT) issued a circular guiding employers on TDS deductions from employees’ salaries. This circular was based on the changes introduced in the new tax regime during Budget 2023. However, it did not clarify whether employees could switch tax regimes during the financial year for TDS purposes.
Shalini Jain, Tax Partner at EY India, suggests that unless the income tax department issues a notification to the contrary, it seems reasonable that employees who initially chose the old tax regime should be allowed to switch back to the now more attractive new tax regime. This would enable them to benefit from the recent changes in the Finance Bill 2024.
Chartered accountants note that whether employees are allowed to switch regimes mid-year depends on the employers’ discretion, as the circular does not address this issue. Allowing employees to change tax regimes during the financial year would require employers to recalculate TDS based on the new regime and adjust the amount of tax to be deducted accordingly. Many employers may be reluctant to offer this option due to the additional administrative burden.
Given that the changes in the new tax regime were announced in July, with eight months remaining in the financial year, the government should encourage employers to allow employees to switch their tax regime for TDS purposes. It’s likely that only some employees who opted for the old tax regime in April 2024 would take advantage of this option if offered, as those who chose the new regime are likely to stick with it due to its increased attractiveness.
The CBDT typically issues a circular on TDS from salaries for employers after the Finance Bill receives the President’s assent and is notified. Therefore, it is suggested that the board include a provision allowing employees to switch tax regimes in this circular for FY 2024-25. Alternatively, a separate advisory could be issued to achieve the same purpose.
If employers do not provide the option to switch tax regimes for TDS purposes, employees who chose the old tax regime in April 2024 may have to submit tax-saving proofs in the last three months of the financial year to ensure that the appropriate deductions are made. If these proofs are not submitted, higher TDS may be deducted, as the relevant deductions would not have been considered.
Employees can still opt for the new tax regime when filing their ITRs in July 2025 for FY 2024-25 (AY 2025-26). If TDS from their salary is higher than required under the new regime and cannot be adjusted against other income, they may need to claim an income tax refund.
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