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CBDT Issues Circular to Clarify Option under Section 115BAC and TDS by Employer

cbdt-issues-circular-to-clarify-option-under-section-115bac-and-tds-by-employer

CBDT has issued a Circular No. C1/2020 dated 13.04.2020 to clarify the deduction of TDS by the employer from the payment of Salary Income to its employees during the FY 2020-21 subsequent to the introduction of Section 115BAC by the Finance Act, 2020.

CBDT has clarified the much-awaited clarification on the applicability of the new tax regime under section 115BAC. There was a huge confusion among the employers as to how the employers should proceed for the deduction of tax from salary income paid or payable to the employees in the FY 2020-21 (or AY 2021-22).

CBDT issues Circular C1 of 2020 dated 13.04.2020 clarifying the process of exercising of option by a taxpayer with regard to deduction of tax at source if he/she opts for the concessional rates of tax as per section 115BAC of IT Act,1961.

An employee is required to intimate his employer of the intention to opt for new concessional rates. Intimation so given will be applicable for the year & can't be modified. However, the employee will continue to have the right to exercise such option or continue with the earlier scheme at the time of filing of the ITR, the Circular clarifies.

Section 115BAC is made applicable from April 1, 2020 and every employer is required to deduct income tax (TDS) from the salary income paid or payable to the employees under section 192 of the Income Tax Act, 1961 if the total income of the employee exceeds the basic exemption limit.

For this purpose, every employer at the beginning of the financial year in the month of April takes proposal of investments from the employees to be considered for the computation of total income for the year and based on that employer starts deducting tax or TDS from the salary income every month.

Till FY 2019-20, there was only one tax regime and hence the same was uniformly followed by every employer. However, from FY 2020-21, another parallel tax regime is introduced where lower or concessional rates of tax are provided but restricted many deductions and exemptions.

Because of two tax regimes, every employer was in dilemma as to under which provisions employer should deduct tax from the salary income of the employee. The law mandated to deduct tax at the rates of tax as specified in the Finance Act, 2020 but the new tax provision allows lower tax rates which may be exercised by the employee but employer cannot do so because of the legal restriction. 

Read this Article that discussed the question of deducting tax from salary under the new tax regime - Section 115BAC.

An employer may face trouble for short deduction of tax under the law if the employer allows or computes tax as per the new tax regime and by not allowing the employer to deduct TDS as per new tax regime would provide lower disposable income to the employee which the government wants to increase by reducing the taxes.

Hence, a clarification was highly required from the CBDT on the matter.

Finally, CBDT has issued a clarification on 13.04.2020 by issuing a Circular No. C1/2020 of the even date.

The Circular states that as the option provided under section 115BAC is required to be exercised at the time of filing of the return, the deductor, being an employer, would not know if the person, being an employee, would opt for taxation under section 115BAC of the act or not. Hence, there is a lack of clarity regarding whether the provisions of section 115BAC of the Income Tax Act are to be considered at the time of deducting tax.

Employees having no Business or Professional Income:

The Circular clarifies that under such circumstances, the employer shall obtain a declaration every year from the employee concerned for deduction of tax as per section 115BAC. In other words, it is the duty of the employee to intimate the option to the employer. In case no such intimation is received by the employer, the default option for the employer is to deduct TDS from such employees’ salary income as per old or normal tax rates.

It is also clarified that such an intimation needs to be intimated to the employee only once in a year and cannot be changed thereafter.

The intimation to the employer about the exercise of the new option shall not be regarded as an exercise of the option under section 115BAC(5). It means the employee has to exercise the option at the time of filing of return which will be considered final by the income-tax authority under the law. Since the intimation to the employer is given at the beginning of the financial year and the option is required to be exercised after the end of the financial year, the Circular clarifies that option at the time of filing of return of income under sub-section (1) of section 139 of the Income Tax Act could be different from the intimation made by such employee to the employer for that previous year.

The above clarification is for the employees who do not have income from business or profession.

Employees having Business or Professional Income:

In the case of employees having Business or Profession Income, the clarification is quite different. This is because if an individual, having a business or professional income, once exercises the option cannot revoke the option in subsequent years, except only once.

Therefore, for such employees, it is provided that-

1. Since FY 2020-21 or AY 2021-22 is the first year of Section 115BAC, an employee having income from Business or Profession cannot intimate his option for the new tax regime to the employer. In this case, the employer shall deduct TDS from the salary income as per the old or normal tax regime.

2. An employer can accept intimation from such employee only from the financial year after he has exercised the option at the time of filing of return of income. Till then the employer should deduct TDS from his salary only under the old tax regime.

The Circular did not prescribe any format of intimation. Every employer has to draft intimation/declaration as per their choice but the declaration must include the fact the employee has no income from business or profession or that he has exercised the new regime tax option in the preceding year’s ITR.

It must be remembered that income from futures and option falls under the head ‘Income from Business’. 



Read the full text of the CBDT Circular No. C1/2020 dated 13.04.2020 Clarifying the TDS from Salary after the introduction of section 115BAC

Circular C1 of 2020 



F. No. 370142/13/2020-TPL

Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes 
*****

New Delhi, April 13,2020 


Clarification in respect of option under section 115BAC of the Income-tax Act, 1961

Section 115BAC of the Income-tax Act, 1961 (the Act), inserted by the Finance Act, 2020 wef the assessment year 2021-22, inter alia, provides that a person, being an individual or a Hindu undivided family having income other than income from business or profession", may exercise option in respect of a previous year to be taxed under the said section 115BAC alongwith his return of income to be furnished under sub-section (1) of section 139 of the Act for each year. The concessional rate provided under section 115BAC of the Act is subject to the condition that the total income shall be computed without specified exemption or deduction, setoff of loss and additional depreciation. 

2. Representations expressing concern regarding tax to be deducted at source (TDS) has been received stating that as the option is required to be exercised at the time of filing of  return, the deductor, being an employer, would not know if the person, being an employee, would opt for taxation under section 115BAC of the Act or not. Hence, there is lack of clarity regarding whether the provisions of section 115BAC of the Act are to be considered at the time of deducting tax. 

3. In order to avoid the genuine hardship in such cases, the Board, in exercise of powers conferred under section 119 of the Act, hereby clarifies that an employee, having income other than the income under the head "profit and gains of business or profession" and intending to opt for the concessional rate under section 115BAC of the Act, may intimate the deductor, being his employer, of such intention for each previous year and upon such intimation, the deductor shall compute his total income, and make TDS thereon in accordance with the provisions of section 115BAC of the Act. If such intimation is not made by the employee, the employer shall make TDS without considering the provision of section 115BAC of the Act.

4. It is also clarified that the intimation so made to the deductor shall be only for the purposes of TDS during the previous year and cannot be modified during that year. However, the intimation would not amount to exercising option in terms of sub-section (5) of section 115BAC of the Act and the person shall be required to do so along with the return to be furnished under sub-section (1) of section 139 of the Act for that previous year. Thus, option at the time of filing of return of income under sub-section (1) of section 139 of the Act could be different from the intimation made by such employee to the employer for that previous year.

5. Further, in case of a person who has income under the head "profit and gains of business or profession" also, the option for taxation under section 115BAC of the Act once exercised for a previous year at the time of filing of return of income under sub-section (1) of section 139 of the Act cannot be changed for subsequent previous years except in certain circumstances.

Accordingly, the above clarification would apply to such person with a modification that the intimation to the employer in his case for subsequent previous years must not deviate from the option under section 115BAC of the Act once exercised in a previous year.


(Niraj Kumar)

Deputy Secretary (TPL)-I


Download Copy of CBDT Circular No. C1/2020 dated 13.04.2020 Clarifying the TDS from Salary after the introduction of section 115BAC

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