IT Department Asks Employers To Verify Employees' Tax Regime Option For TDS

The Income Tax (IT) Department has reiterated the particulars regarding tax deducted at source (TDS) for the employers and employees under the Finance Act 2023, effective April 1 this year.

In a circular on April 5, the Central Board of Direct Taxes (CBDT) under the Ministry of Finance directed the employers to ask for information from employees who have income under section 192 of the Act regarding their intended tax regime. And upon receiving their responses, the deductor or the employer will compute the employee's total income for TDS based on their selected option.

It added that if the employee does not intimate the same, "it shall be presumed" that the employee has not exercised the option to opt out of the new tax regime. And accordingly, the employer would deduct TDS as per the rates provided under sub-section (lA) of section 115BAC of the Income Tax Act.

From the financial year 2023-24, the new tax regime has become the default tax regime for taxpayers, and those who want to continue with the old one must inform the employer in advance.

The circular said the "Regime applies to an individual or Hindu undivided family or association of persons (other than a cooperative society) or body of individuals, whether incorporated or not, or an artificial juridical person. Under this new Regime, the income tax for the person's total income shall be computed at the rates provided in sub-section (1 A) of section 115BAC, subject to certain conditions, including that the person does not avail of specified exemptions and deductions."

However, the IT department notes that "under sub-section (6) of section 115BAC of the Act, a person may exercise an option to opt out of this tax regime. A person not having income from a business or profession can exercise this option every year."

According to the department, the fresh circular was issued after it received representations "expressing concerns regarding TDS as the deductor would not know if the employee would opt-out from taxation under sub-section (1 A) of section 115BAC of the Act or not."

It further clarified that "the intimation would not amount to exercising the option in terms of sub-section (6) of section 115BAC of the Act, and the person shall be required to do so separately under the provisions of the sub-section."

Commenting on the directions from the IT department, Homi Mistry, partner at Deloitte India, says, "The CBDT has clarified that a deductor being an employer shall seek information from each employee having salary income regarding the tax regime they want to opt for (whether the old regime or the new [default tax regime) and every employee shall intimate the same to the

employer regarding their intended tax regime for each year, and accordingly the deductor (i.e. employer) shall compute the employee's income and deduct tax thereon based upon the option exercised."