With the option for another income tax slab available for income earned in 2020-21, the Central Board of Direct Taxes (CBDT) on Monday issued a clarification saying that an employer will have to obtain a declaration from their employee on whether they intend to opt for the new tax regime. However, the employee will continue to have the right between the two choices at the time of filing return, during April-July 2021.

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The tax department needed to issues a clarification as representations were queuing up to address the dilemma for the employer who has to deduct tax at source under Section 192 on a month-to-month basis. Salary processing for April 2020 is upon employers as per the rule of deducting tax at the average rate computed on the basis of "rates in force".

The employers were seeking clarity on "rates in force" from the tax department.

With tax department’s clarification the employer now has the option to deduct an employee’s tax at source by computing their tax on the basis of the option they choose.

But tax experts still say that this clarification is not enough. "Even as government has clarified what an employer has to do but for employees, the issue of mismatch in the income as reported by the employer in Form 16/26AS and as declared by the employee in their return may still arise in case such employee after intimating the employer of new rates, but at time of filing of the return chooses to opt for old rates and claims various exemptions and deductions," said Ved Jain, former president of the Institute of Chartered Accountants of India.

The government in the 2020 budget announced a new tax slab and by Finance Act, 2020 inserted a new section 115BAC, giving an option to individuals and Hindu undivided family (HUF) to opt for lower tax rate but forego various exemptions and deductions, including the standard deduction. This option can be exercised by such individual or HUF at the time of filing the return.

But it failed to clarify employers’ obligations while deducting tax on monthly salaries.

“Section 192 of the Income-tax Act casts an obligation on the employer to deduct tax at source on salary of an employee, as per ‘rates in force’ as prescribed in section 2(37A) of the Act. However, no consequential amendment had been proposed, either under section 192 or under section 2(37A) to include the reference of the new and simplified personal tax regime under section 115BAC,” said Mukesh Patel, tax practitioner and member of task force on simplification of direct tax legislation.

“It was being considered that if an employee opted for the new regime, they would need to claim refund only under their tax return, for the amount of TDS made which exceeded their tax liability under new regime.

“The above approach would have meant that the relief announced by the government offering concessional tax rates would have virtually proved to be illusory in case of a salaried employee," Patel concluded.

First Published:Apr 13, 2020 5:48 PM IST