How to choose the tax regime for TDS on salary for FY2020-21


The Central Board of Direct Taxes (CBDT), via a circular dated April 13, clarified that employers will have to deduct TDS from salary for FY 2020-21 as per the tax regime – new or old – chosen by the employee. If an employee wants to go for the new tax regime he/she must inform the employer of this else by default TDS would be deducted as per old regime tax rates.

Remember, TDS on salary is deducted as per the applicable tax slab rates on your income whereas TDS on say interest income from fixed deposits is deducted at only 10%.

Also, once the choice of tax regime has been communicated to the employer, the employee cannot change the choice of tax regime during the financial year. However, an employee will have the option to switch the tax regime at the time of filing tax return (ITR), the circular stated.

Therefore, here are four things you should consider when choosing your tax regime for TDS from salary for this financial year.

Likely to lose out on these tax-exemptions while filing ITR
If you opt for the new tax regime for the purpose of TDS from salary but switch to old regime when filing ITR then you may be unable to claim certain tax exemptions which are otherwise allowed in the old regime. These tax exemptions are: tax benefits on food coupons and tax exemption on leave travel allowance (LTA).

Abhishek Soni, CEO & founder, says, “As per the Budget documents, tax benefit on food coupon is not available to employees in the new tax regime. However, the government is yet to issue a notification to amend the relevant laws regarding the same. Therefore, if you opt for new tax regime for TDS on salary in FY 2020-21, it is likely you will not be able to avail such tax benefit on food coupons.”

Under the old tax regime, an employer can give pre-paid food coupons/vouchers to employees which often employers did and included it as part of the employees’ Cost To Company. This helped employees lower their taxable income as food vouchers up to Rs 50 per meal per day is exempted from tax as per old tax regime.

Regarding whether tax exemption on LTA can be claimed at the time of filing ITR (in case employee switches to old tax regime at that time), chartered accountants do not have a clear answer yet.

Alok Agrawal, Partner, Deloitte India says, “An employee should be able to claim tax-exemption on LTA if he has chosen the old regime at the tax return stage, provided he/she satisfies the conditions eligible for claiming it and has received LTA from his employer as part of his salary structure.”

Soni says, “There is no clarity in the income tax laws whether LTA can be claimed at the time of filing ITR or not. One view suggests that LTA cannot be claimed directly while filing ITR as wordings of the relevant section suggest that it is reimbursement which has to be claimed from the employer. Other view suggests that an employee is eligible to claim tax-exemption on LTA directly in ITR as long as relevant conditions are met. Therefore, a clarification in this regard would be helpful.”

The new tax regime does not allow tax exemptions and deductions. Therefore, if an employee opts for the new tax regime for tax deduction on salary, then it is not clear whether such an exemption can be claimed if one opts for the old tax regime at the time of filing ITR.

However, other tax exemptions such as on house rent allowance (HRA) and common deductions under sections 80C, 80D etc can be claimed in ITR if you switch from new regime to old tax regime when filing ITR.

What If I do not communicate choice of tax regime to my employer?
Agrawal says, “The CBDT circular has clarified that unless communicated by an employee, the employer should deduct taxes from salary income as per the existing/old tax regime. This would mean that if you have not communicated your decision for a particular tax regime in the month of April, then your employer will continue to deduct TDS as per the existing/old tax regime.”

Further, if you do not submit proof of investments or declare how much investments you will be making in FY 2020-21, then this could lead to TDS from salary without the benefit of these exemptions.

“If you communicate your choice of new tax regime to your employer in the month of June, then TDS from June till the end of the financial year will be deducted as per the new tax rates subject to any adjustment for excess TDS deducted for April and May which can be made by the employer,” adds Agrawal.

Don’t forget the advance tax
Agrawal says, “Irrespective whether you choose the old tax regime or new tax regime, if your total tax liability on all income streams less of TDS is more than Rs 10,000 in the financial year, then you are liable to pay advance tax. If the advance tax instalments are not paid on time, then an individual is liable to pay penal interest at the rate of 1 per cent per month on the tax amount due under the Income-tax Act. As the Income tax authorities may levy this interest if the overall advance tax amount payable is not fully paid due to short-deduction of tax at source (TDS) by the employer, it is advisable that you should carefully plan your annual salary taxation in advance and then make the appropriate declaration to the employer on choice of regime.”

The income tax laws allow switching of tax regime at the time of filing the tax return. Considering the other incomes (like interest etc) , a self-assessment/advance tax may be payable, if there is a short deduction of tax from salary if an employee chooses the new tax regime for TDS from salary but switches to old tax regime at the time of filing return.

If I opt for new tax regime for TDS from salary
Soni says, “If you opt for new tax regime for deduction of taxes from salary, then remember your Form 16 will not have details of all the tax-exemptions and deductions that you may be eligible to claim if you opt for the existing/old tax regime at the time of filing ITR.”

You will have to collect all the required documents and calculate the total amount of deductions that you are eligible to claim on your own. However, remember, you are not required to submit any documents to the tax department at the time of filing ITR.

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