Section 115BAC and TDS from Salary Income-Guide for Employers

section-115bac-and-tds-from-salary-income-guide-for-employers

How to deduct TDS from Salary as per New Tax Regime: After the introduction of the new tax regime for individuals and HUF under section 115BAC, many raised queries regarding how TDS was to be deducted from the salaries of employees as they could choose between two tax regimesCan TDS against salary be deducted as per the newly introduced concessional tax regime? Or is it mandatory for the employer to deduct tax as per the old regime?

It may be recalled that the Finance Act, 2020, had given an option to individuals to opt for concessional tax rates under the new tax regime under section 115BAC.

Employers are finding it difficult to decide whether to allow employees to opt for the new regime and deduct TDS accordingly or continue with the old regime for all employees.


    Introduction


    As we are aware that the Finance Act, 2020 has introduced a new provision Section 115BAC in the Income Tax Act, 1961 to provide for a concessional rate of tax on the total income to Individuals and HUFs.

    Section 115BAC is optional and can be opted by an Individual or HUF if he foregoes certain deductions and exemptions.

    Till FY 2019-20 (or AY 2020-21) there was only one regime of taxation for Individuals and HUFs and are required to compute the taxes on total income as per the rates of tax as specified in the Finance Act of every year.

    However, from April 1, 2020, a new tax regime under section 115BAC is parallelly introduced to provide for a concessional rate of tax on the total income. Hence, from AY 2021-22 (or FY 2020-21, there are two operative tax regimes - One is the old tax regime where all the applicable deductions and exemptions are available and the tax rates are as per the rates of tax specified in the Finance Act, 2020.

    The second one is section 115BAC which is a new tax regime and claims of many specified deductions and exemptions have been disallowed but lower tax rates are provided in the section 115BAC itself.

    It is not that the concessional rate of taxation without any deduction or exemptions is introduced for the Individuals and HUFs only. Finance Act, 2020 has also introduced section 115BAD to provide for lower or concessional rate of tax for resident co-operative societies with the condition that it has to forego certain deductions and exemptions.

    Similarly, lower or concessional rates of tax were also provided for the domestic company assessees from the AY 2020-21 (or FY 2019-20) under section 115BAA. The concessional rate of 25 per cent is provided as against normal 30 per cent tax rate. For a new domestic manufacturing company, the tax rate is even lower at 15 per cent under section 115BAB.

    Section 115BAC provides an option to an Individual or HUF to pay the taxes at the lower or concessional rate of tax with claiming the specified deductions and restrictions. Please note that this new tax regime is optional and may or may not be exercised by the assessee. If an Individual finds the old tax regime with deductions and exemption is more beneficial to him he may continue with the old tax regime. Further, such an option is required to be exercised by the individual before the filing of return of income u/s 139(1) if such an Individual has a business or professional income. In other cases, for salaried individuals having no business income, the option needs to be exercised at the time of filing of the return of income.

    Issue of Tax Deduction in the New Tax Regime


    Under the Income Tax Act, an employer is under a legal obligation to deduct income tax or TDS from salary income being paid to the employees under section 192 after estimating the income of the employee. From FY 2020-21 or AY 2021-22, an employee has been given two options to pay the tax under the new regime section 115BAC or under the old regime as per normal rates of tax. An employee has been given two options which poised an employer in a great degree of dilemma. As a result, to clear the ambiguity and in order to bring certainty in the matter related to deduction of income tax (TDS) from the salary income of an employee, CBDT had issued a clarificatory circular.

    Employer’s legal Obligation under section 192

    Section 192(1) of the Income Tax Act, 1961 provides for the following-

    192. (1) Any person responsible for paying any income chargeable under the head "Salaries" shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year.

    Hence section 192 imposes two obligations on the employer for the purpose of deduction of Income Tax from the salary paid to the employees in a financial year.

    Employer is required to compute the Estimated Income of the employees

    Every employer is required to compute the estimated total income of the employee. For this purpose, the employer is required to estimate the total amount of emoluments that the company will pay to the employees during a financial year. This includes payment of monthly salary, payment of annual bonus, incentives, commission, etc. and all other periodic payments which an employer may pay during the year.

    Further, the employer also computes the value of perquisites provided to an employee in determining the estimated income of an employee.

    Thereafter the investment proposals are taken at the beginning of the financial year from the employees concerned who quantify their tax investments and inform the same to the employer. For this purpose, the employer requests all the eligible employees to submit the Form 12BB at the beginning of the financial year. The collected information about tax saving instruments is then applied to the annual emoluments. The employer allows deductions and exemptions which an employee otherwise entitled under the Income Tax Act and derives the estimated total income of the employee for the financial year.

    New tax option- On the other hand, Individuals have a choice to make. They have to decide whether or not to opt for the concessional tax rates under the newly introduced ‘simplified’ personal tax regime, which came into effect from April 1 by foregoing certain tax exemptions and deductions.

    In case an employee wishes to opt for the new tax regime prescribed under section 115BAC then the investment declaration has no relevance for the employee since section 115BAC does not allow any deduction under any section of Chapter VI-A or exemption. Hence if the employee does not submit the proposed investments to the employer then the employer will estimate the income without considering any deduction under Chapter VI-A, House Rent payments, interest on home loan, etc. But the employer will allow the standard deduction, the deduction for professional tax, etc. Employees contribution to EPF may also be allowed by the employer, although even the standard deduction, etc. are also not allowed in the new tax regime.

    The problem is here in the absence of any legal provision, how the employer will come to know whether the non-submission of investment declaration by the employee is due to the fact that he is opting the new tax regime or otherwise. Further, the option to choose new tax regime is required to be exercised by the employee at the time of filing of his income tax return whereas the employer needs the same at the beginning of the financial year.

    Employer is required to Compute and deduct Income Tax on the Estimated Income

    After determining the estimated total income of an employee, the next obligation of the employer is to compute the tax. Here lies the problem. The rates of tax under the old tax regime and the new tax regime are totally different. 

    Under the old tax regime, the rates of tax are given in the Finance Act. For the FY 2020-21 or AY 2021-22, the rates of tax for an Individual below 60 years of age is given in the Paragraph A of Part-III of the First Schedule of Finance Act, 2020 is given below-

    Total Income
    Income-Tax Rate
    Up to Rs. 2,50,000
    Nil
    Rs. 2,50,001 to Rs. 5,00,000
    5%
    Rs. 5,00,001 to Rs. 10,00,000
    20%
    Above Rs. 10,00,000
    30%

    However, the new tax rates are given in the Income Tax itself in section 115BAC. As per section 115BAC, the rates of tax for FY 2020-21 or AY 2021-22 is given below-

    Sl. No.
    Total income
    Rate of tax
    1.
    Upto Rs 2,50,000
    Nil
    2.
    From Rs 2,50,001 to Rs 5,00,000
    5 percent
    3.
    From Rs 5,00,001 to Rs 7,50,000
    10 percent
    4.
    From Rs 7,50,001 to Rs 10,00,000
    15 percent
    5.
    From Rs 10,00,001 to Rs 12,50,000
    20 percent
    6.
    From Rs 12,50,001 to Rs 15,00,000
    25 percent
    7.
    Above Rs 15,00,000
    30 percent

    The 'rates in force' as mentioned in section 192(1) is defined in clause (37A) of section 2 of the Income Tax Act and is reproduced below-

    Section 2

    (37A) "rate or rates in force" or "rates in force", in relation to an assessment year or financial year, means—

    (i) for the purposes of calculating income-tax under the first proviso to sub-section (5) of section 132, or computing the income-tax chargeable under sub-section (4) of section 172 or sub-section (2) of section 174 or section 175 or sub-section (2) of section 176 or deducting income-tax under section 192 from income chargeable under the head "Salaries" or computation of the "advance tax" payable under Chapter XVII-C in a case not falling under section 115A or section 115B or section 115BB or section 115BBB or section 115E or section 164 or section 164A or section 167B, the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year, and for the purposes of computation of the "advance tax" payable under Chapter XVII-C in a case falling under section 115A or section 115B or section 115BB or section 115BBB or section 115E or section 164 or section 164A or section 167B, the rate or rates specified in section 115A or section 115B or section 115BB or section 115BBB or section 115E or section 164 or section 164A or section 167B, as the case may be, or the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year, whichever is applicable ;

    Hence, section 2(37A) states that 'rates in force' as provided in section 192(1) shall mean the rates of income-tax as specified in the Finance Act of the relevant financial year.

    For the Financial Year 2020-21, the relevant Finance Act is the Finance Act, 2020.

    Paragraph A of Part-III of the First Schedule provides the rates of taxes for deduction of income-tax from salaries under section 192. It states that in cases in which income-tax has to be deducted from income chargeable under the head “Salaries” under section 192 of the Income Tax Act shall be deducted at the rate or rates as discussed above.

    Surcharge and Health & Education Cess

    Section 2(9) of the Finance Act, 2020 provides for a surcharge on the rates of tax provided in Part-III of the First Schedule of the Finance Act, 2020 in the following manner-

    Sl
    Quantum of Total Income
    Rate of Surcharge
    (a)
    Where the total income (including the income under the provisions of section 111A and section 112A ) exceeds Rs. 50 Lakh but does not exceed Rs. 1.0 Crore
    10%
    (b)
    Where the total income (including the income under the provisions of section 111A and section 112A) exceeds Rs. 1.0 Crore but does not exceed Rs. 2.0 Crore
    15 %
    (c)
    Where the total income (excluding the income under the provisions of section 111A and section 112A) exceeds Rs. 2.0 Crore but does not exceed Rs. 5.0 Crore
    25 %
    (d)
    Where the total income (excluding the income under the provisions of section 111A and section 112A) exceeds Rs. 5.0 Crore
    37%
    (e)
    Where the total income (including the income under the provisions of section 111A and section 112A) exceeds Rs. 2.0 Crore, but is not covered under clauses (c) and (d)
    15%

    An exceptional provision is provided where the total income includes any income chargeable under section 111A and section 112A of the Income-tax Act, the rate of surcharge on the amount of income-tax computed on that part of the income shall not exceed 15 per cent.

    Section 2(12) of the Finance Act, 2020 provides that the income tax and surcharge, if applicable, so computed shall be increased by 4 per cent as “Health and Education Cess".

    The basic rates of tax as prescribed both .0under the old regime or the new tax regime shall be increased by the surcharge and cess as mentioned above.

    How an employer shall proceed to deduct tax when the new tax regime is in force


    A combined literal reading of the above provisions indicates that an employer has to deduct TDS from salary income as per the normal or old rates of tax only.

    Therefore under the law an employer is mandatorily required to deduct the TDS from the salary income paid to employees as per the rates of tax specified in the Finance Act, 2020 which is as per the old regime of the taxation system which leads to the interpretation that an employer cannot deduct income tax from the salary paid to employees at the rates of tax specified in section 115BAC even if the employee opts for the new regime of taxation.

    Since the employer will deduct income tax on salary as per the old scheme, the employer can consider all the exemptions and deductions while computing the estimated income of the employee for the FY 2020-21. If the employee does not submit his or her investment details and evidence with Form 12BB, certain exemptions or deductions like standard deduction, the deduction for professional tax, employee's contribution to provident fund, may be considered by the employer while computing his or her estimated income.

    Salient feature of the New Tax Regime as introduced by Section 115BAC


    The salient features of new section 115BAC are listed below-

    1. Optional Scheme: The scheme of taxation prescribed in section 115BAC is optional. It means an individual or a HUF may or may not opt for this scheme and continue the old regime of taxation.

    2. Applicability: Section 115BAC is applicable only to an individual or a HUF. This section will come into effect from the assessment year (AY) 2021-22.

    The individual taxpayer may be a resident or non-resident, senior citizen or a very senior citizen, a male assessee or a female taxpayer.

    3. No separate basic exemption limit: The tax shall be levied on total income as per the table given in the section itself. The analysis of the tax rate table reveals that the basic exemption limit is Rs. 2,50,000 across the board. Even for a senior citizen or a very senior citizen, the tax exemption slab is limited to Rs. 2,50,000 only. There is no different basic exemption limit provided for a senior citizen, a very senior citizen and other taxpayers below 60 years of age.

    4. Conditions: To claim the reduced tax rate, one needs to fulfill the conditions specified in section 115BAC(2). 

    Sub-section (2) provides that the concessional rate of tax shall be applicable only if the 'total income' of the individual or HUF shall be computed as stated below-

    (i) The total income is computed without any exemption or deduction under the following sections-

    Section
    Particulars
    Section 10(5)
    Exemption for Leave Travel Allowance
    Section 10(13A)
    Exemption for House Rent allowance
    Section 10(14)
    Exemption from any other allowance
    Section 10(17)
    Exemption from allowance to MPs or MLAs
    Section 10(32)
    Exemption of Rs. 1,500 in case of clubbing of minor child income
    Section 10AA
    Exemption for newly established Units in Special Economic Zones
    Section 16
    Standard Deduction of Rs. 50,000; Entertainment Allowance of Rs. 5,000 and Professional Tax
    Section 24(b)
    Interest paid on on home loan
    Section 57(iia)
    Deduction from family pension income , equal to 33 1/3 per cent of such income or Rs. 15,000, whichever is less.
    Deduction under Chapter VI-A
    Except section 80CCD(2) and section 80JJA
    Section 80C, Section 80D, Section 80CCD(1B), Section 80G, etc.

    [The above list is trimmed to show only the exemptions and deduction is related to a salaried Individual.]


    (ii) The total income is computed without set-off of any loss under the head “Income from house property” with any other head of income.

    A point is required to be noted that interest on home loan under section 24(b) is not allowed under section 115BAC(2)(i). It appears that loss arising from let-out house property is allowed. It is wrong. The same is restricted under section 115BAC(2)(ii)(b).

    (iii) In case of salary income, the total income should be computed without any exemption or deduction for allowances or perquisite, by whatever name called, provided under any other law for the time being in force.

    5. Exercising the option: To exercise the option under this section, one has to inform the same to the income tax department. This can be done at the time of filing of return of income (ITR) or on or before the due date of filing of return of income (ITR) and is based on individual or HUF's composition of income as detailed below-

    In case of an Individual or HUF having no business or professional income (for example, a salaried individual), the option needs to be exercised at the time of filing of return of income (ITR) along with the ITR. This needs to be done every year.

    Hence, a salaried or other individuals (or HUF) having no business income has to exercise this option every year if he opts to pay tax under the new scheme. The homework of tax payable under the old and new tax regime is an annual exercise.

    For an individual or HUF having no business income can change the option every year. The option once exercised does not become permanent for all the future years. Hence, if an individual finds that the new tax regime is more beneficial to him than the old tax regime, he may go for the new tax regime. If in the next year he finds that the old tax regime is more beneficial to him he can revert to the old tax regime in the next year and so on.

    Hence, for an Individual, including a salaried individual, or HUF having no business or professional income the comparison of tax payable under the old and new tax regime has to be done every financial year to find out the maximum savings in tax liability.

    Remember, in this context, if a salaried individual has income from future and options or from day trading of shares on stock exchanges, which happens in many cases of employees, then such income falls under the head ‘income from business’.

    In case of an Individual or HUF having a business or Professional income, including a salaried individual having income from future and options or from day trading of shares on stock exchanges, has to exercise the option within the due date of filing of return u/s 139(1). In case a belated return is filed, then also the option u/s 115BAC(5) needs to be exercised within the due date of filing of return u/s 139(1). In this case, once the option is exercised, cannot be changed in future years. Therefore, one needs to be very cautious while exercising the option.

    However, an Individual or HUF having a business or Professional income can revert to the old tax regime once in a lifetime. He has been allowed to switch back to the old tax regime after exercising the new tax regime option, but it must be remembered that once a person exits from the new tax regime, he can never re-enter into the new tax regime.

    New tax regime and TDS from Salary - Contrasting provisions


    The option to go for the new tax regime is given to an employee in his individual capacity but no such option is available to an employer. Hence, an employer shall deduct income tax (TDS) on salary only on the basis of the old regime of taxation for the financial year. 

    This inconsistency in the provisions of TDS by the employer and option to employees under the new tax regime defeats the purpose for which the new tax regime is introduced. This may result in disproportionate TDS and the employee might have to claim a refund in his ITR.

    The Finance Minister in her budget speech announced the purpose of introducing the new tax regime to provide relief to the individual taxpayers. The Finance Minister further added that in the new and simplified personal income tax regime the income tax rates would be significantly reduced for the individual taxpayers who forgo certain deductions and exemptions. The lower income tax burden will increase the net payout to the employees who can spend more and can boost the economy by consuming more.

    If the employer, as per the legal provisions, continues to deduct the tax at old rates then the purpose for which the new lower tax rate regime is introduced would be defeated and serve no purpose at all.

    In case an employer goes by the objective of introducing the new tax regime he may face penal consequences for short deduction of tax.

    Clarification from CBDT


    To overcome the contrasted situation and to sort out this issue, a big relief has come from the CBDT which has issued a Circular No. C1/2020 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 Income Tax Act,1961. This was indeed the need of the hour. This clarification was highly solicited so that tax can be appropriately deducted from salaries paid in April. This will help both the employers and the employees.

    The Circular addressed the issue of tax deduction at source from an employee's salary in case the employee opts for the new tax regime in FY 2020-21. The rules are different for employees not having business or professional income and employees having a business or professional income.

    Employees having no business or professional income

    As per the circular, "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."

    This would mean that if an employee opts for the new tax regime then TDS on salary will be deducted as per the estimated total tax calculated as per the new lower tax rate regime instead of as per the estimated tax calculated as per old tax regime.

    The circular clarifies that once the new tax regime is opted by an individual at the start of the financial year, then such option cannot be changed or modified during the financial year so far as TDS is concerned. However, as per the circular, the option can be changed at the time of filing of the income tax return (ITR) by the employee.

    "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", said the circular.

    Such intimation has to be given to the employer by the employee every year. In case no intimation is given by the employee, then the employer has to deduct TDS as per the old tax regime.

    The above rule is made for an employee having no business or professional income.

    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 of new tax regime cannot revoke the option in subsequent years, except only once.

    As per the circular, "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 incomc 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."

    It states that an employee having business or professional income shall intimate the employer about the option that he has exercised at the time of filing of return of income (ITR). If he has exercised the new tax option under section 115BAC in the filing of return then he must intimate the same to the employer. The intimation shall not be different from the options exercised by the employee in his ITR.

    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 exercised option in the ITR in the new tax regime to the employer. In this case, he is free to intimate his option to his employer and the employer shall deduct TDS from the salary income accordingly. In subsequent years, the employee shall intimate the option as per the option exercised by him in his personal ITR to the employer.

    The clarifications given by the CBDT in the circular clarifying the process to be followed by Employer for deduction of TDS on Salaries are summarized as mentioned below:

    1. It is clarified that an employer has to deduct TDS for FY 2020-21, from an employee’s salary on the basis of the intimation given by the employee about exercising the new lower tax regime if the employee opts for it.

    2. In case an employee has income from business or profession, the option intimated to the employer shall commensurate with the option exercised by him in the preceding ITR.

    3. If no such intimation is given, then the employer should deduct TDS as per the legal provisions which require deduction of tax as per old regime or at normal rates of tax.

    4. It is further clarified that once the regime is opted by an individual employee at the start of the financial year, then such option cannot be changed during the financial year as far as TDS by the employer is concerned

    5. However, the individual employee is free to change the option at the time of filing of the return, irrespective of the regime he chooses with his employer for deduction of TDS.

    Conclusion


    The new tax regime though termed as lower or concessional tax regime but one should not forget that no deduction or exemption is allowed in this regime. This option is not so beneficial as it is hyped. According to a report by SBI Research's Ecowrap, Issue No. 01, FY21 Date: 03 April 2020, less than 10% of the total taxpayers are expected to migrate in the new tax regime as they are the only ones who will be benefited.


    The option needs to be exercised every year which gives homework to every employee every year to compare the tax outgo under the two options and opt for the beneficial one. This is nothing but chaos. This chaos continues for an employee even after the clarification from the CBDT. This is because there may exist discrepancy in the reported income or deduction and exemption by the employer to the income tax authorities. Since the department has introduced the pre-filling of ITRs, any adjustment to the pre-filled figures may invite notices from the income tax department in the name of the employee. Hence, it is advisable to the employees that they should stick to the same option as intimated to the employer even at the time of filing of their personal ITRs. Even though the law prescribes the exercise of the option at the time of filing of ITRs and changing the option intimated to the employers at the time of filing of ITRs, it is clear that an employee has to think on the option at the beginning of the financial year, unlike other assessees. This is because employee class pays advance tax every month, unlike others who pay advance tax quarterly.

    The new tax regime has given an advantageous position to individuals who are not employees like self-employed or having business income but not to an employee. An employee has to plan and do the homework of opting the new tax regime or the old tax regime at the beginning of the financial year whereas the law prescribes to exercise the option at the time of filing of the income tax return under section 139.

    Despite the fact that the Circular casts the duty of the employee to intimate the option to the employer, it becomes the duty of the employer to circulate and collect the intimation from the employees, it would be better if the employer collects intimation from all the employees to avoid any dispute in future. Such intimation shall be collected even if the employee opts for the old tax regime along with Form 12BB.

    Format of Intimation

    A format of intimation is given here for ready reference which may be modified suitably.


    <Name and Address of the Employer>

    <CIN: >


    Intimation about exercising of option under section 115BAC for deduction of Income Tax from Salary Income u/s 192 for the FY 2020-21 (or AY 2021-22)

    I, <Name of the Employee, Designation>, do hereby intimate - 

    1. That I wish to opt/do not wish to opt for the new tax option as prescribed in section 115BAC of the Income Tax Act, 1961 for the FY 2020-21 (AY 2021-22).

    2. That Income Tax from my salary income for the year shall be deducted accordingly.

    3. That I have no Income chargeable to tax under the head Income from Business or Profession.

    4. That I have Income chargeable to tax under the head Income from Business or Profession and I have exercised the option under section 115BAC(5) in my preceding ITR-3 or ITR-4.

    5. That I understand that I cannot change my option so intimated to you with this intimation during the FY 2020-21 as per clarification given by CBDT vide Circular No. C1/2020 dated 13.04.2020.

    [Strike out the point(s) which is not relevant]


    Place:
    Date:
    Signature

    Name of the Employee:__________________

    Designation:__________________ 

    Note: In case no intimation or incomplete or unfilled intimation is received, income tax on the salary income will be deducted as per normal rates of tax as prescribed in the Finance Act, 2020 without considering the provisions of section 115BAC of the Income Tax Act, 1961.

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