Taxation Scheme for Salaried Employees

As you all must be aware of the New Taxation Regime introduced by the Finance Act, 2020 by insertion of section 115BAC in the Income Tax Ac, 1961. Now, there is a lot of confusion going around regarding this and number of questions mentioned below remained unanswered as of now-

(a) How to deduct withholding tax from the salaries of employees?

(b) What procedure need to be followed by the employers to go about it?

(c) What will happen if the employee makes up his mind in between the financial year or towards the end of the financial year to change from Old Scheme to New Scheme or vice versa as it might impact the withholding tax of that employee substantially?

(d) What exemptions and deductions cannot be claimed by the employee if he opts for the New Taxation Scheme?

The above questions ate obvious as deducting withholding tax correctly is the responsibility of the employer.

Section 192 of the Income-Tax Act, 1961 casts responsibility on the employer to deduct tax at source (TDS) on income chargeable under the head “Salaries” at the time of payment 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  employee under the head “Salaries” for that financial year.The deductor is also required to deposit the tax so deducted in Government account within the prescribed time and format as per Section 200 of the Income tax Act,1961. Every deductor is required to furnish a certificate in Form No. 16 to the employee to the effect that tax has been deducted along with certain particulars.

We have mentioned in detail the taxation regime under both the old and new scheme and the process that can be followed by the employers so that the responsibility to deduct TDS of employees can be taken care of. We have tried to answer the questions raised at the beginning of this article in detail through this article.

A) Old Scheme

We have referred it as Old Scheme as status quo will be maintained if the employee continues to be governed by this scheme. All the deductions, exemptions and reliefs etc. available under the Income Tax Act,1961 can be claimed by the eligible employees opting for this scheme which they used to claim in previous financial years.

B) New Scheme

Section 115BAC of the Income Tax Act, 1961, on satisfaction of certain conditions, has provided with an option to pay tax in respect of the total income as per the new slab rates. We have referred it as New Scheme in our article. The option shall be exercised for every previous year for salaried employees having no business income. The option shall become invalid for a previous year or previous years, as the case may be, if the assesse fails to satisfy the conditions and other provisions of the Act shall apply. For salaried employees having no business income, the option shall be exercised along with the return of income.

Conditions attached with the New Scheme

An employee opting for the New Scheme shall not be entitled to the following exemptions/ deductions:

(a) Leave travel concession as contained in clause (5) of section 10;

(b) House rent allowance as contained in clause (13A) of section 10;

(c) Some of the allowance as contained in clause (14) of section 10;

(d) Allowance for income of minor as contained in clause (32) of section 10;

(e)Standard deduction, deduction for entertainment allowance and employment/professional tax as contained insection 16;

(f) Interest under section 24 in respect of self-occupied or vacant property referred to in sub-section (2) of section 23 (Loss under the head income from house property for rented house shall not be allowed to be set off under anyother head and would be allowed to be carried forward as per extant law);

(g) Deduction from family pension under clause (iia) of section 57;

(h) Any deduction under chapter VIA (like section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA,

(i) 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, 80TTA, 80TTB etc). However, deduction undersub-section (2) of section 80CCD (employer contribution on account of employee in notified pension scheme) can be claimed.

(j) Free food and beverage through vouchers provided to the employee

Further, only following allowances as notified under section 10(14) ofthe Income Tax Act, 1961 will be allowed to the employee opting for the New Scheme-

(a) Transport Allowance granted to a divyang employee to meet expenditure for the purpose of commuting betweenplace of residence and place of duty

(b) Conveyance Allowance granted to meet the expenditure on conveyance in performance of duties of an office;

(c) Any Allowance granted to meet the cost of travel on tour or on transfer;

(d) Daily Allowance to meet the ordinary daily charges incurred by an employee on account of absence from hisnormal place of duty.

Income Tax Slab Rates for FY 2020-21 (AY 2021-22)

Income Tax Slab Rates as per old and New Scheme for the financial year 2020-21 is produced below-

(In INR. wherever applicable)

Taxable Income	New  Tax Scheme	Old Tax Scheme
From 1 to 2,50,000	NIL	NIL
From 2,50,001 TO 5,00,000	5%	5%
From 5,00,001 TO 7,50,000	10%	20%
From 7,50,001 TO 10,00,000	15%	20%
From 10,00,001 TO 12,50,000	20%	30%
From 12,50,001 TO 15,00,000	25%	30%
Above 15,00,000	30%	30%
Surcharge	10% (If taxable income > 50 lacs but not > 1 Crore)	10% (If taxable income > 50 lacs but not > 1 Crore)
	15% (If taxable income > 1 Crore but not > 2 Crore)	15% (If taxable income > 1 Crore but not > 2 Crore)
	25% (If taxable income > 2 Crore but not > 5 Crore)	25% (If taxable income > 2 Crore but not > 5 Crore)
	37%  (If taxable income > ₹ 5 Crore)	37%  (If taxable income > ₹ 5 Crore)
Health & Education Cess	4% of (Income Tax + Surcharge)	4% of (Income Tax + Surcharge)

Process that can be followed by Employers

• Those employees who opt for old scheme need to submit the proposed investment declaration forms to their employer on the basis of which withholding tax will be computed by the employer.
• Those employees who opt for New Scheme are not required to submit the proposed investment declaration forms as no exemptions and deductions linked with investment in saving instruments are available in the new scheme.
• By the mid of January towards the end of the financial year, employee needs to submit to his employer a final declaration form as to whether the employee has opted for old scheme or new scheme so that if an employee makes up his mind to change from Old Scheme to New Scheme or vice versa, the burden of the substantial change in the withholding tax of that employee can be spread over next three months i.e. in the months of January, February and March.
• Those employees who have opted for old scheme need to submit the final investment declaration forms to their employer along with the actual proofs of investments made by the employees on the basis of which withholding tax will be computed by the employer and the adjustments, if any can be made.
• Those employees who have opted for New Scheme are not required to submit the final investment declaration forms and/or the proofs of investments as no exemptions and deductions linked with investment in saving instruments are available in the new scheme.
• It is needless to mention here that the employees whose total income doesn’t exceed INR 5 Lakhs per annum are not required to go through the above process as they will be outside the purview of taxation as there is no tax up to total income of INR 5 Lakhs under both the old and new scheme due to Rebate under section 87A of the Income tax Act, 1961.

To conclude, from this financial year 2020-21, employers not only need to get the proposed investment declaration forms from the employees opting for the old scheme but they also need to get the proposed declaration form from the employees as to whether the employee is opting for old scheme or new scheme. Further, towards the end of the financial year, employers not only need to get the actual proofs of investments made by the employees opted for old scheme along with the final investment declaration forms but they also need to get the final declaration form from the employees as to whether the employee has opted for old scheme or new scheme so that the withholding tax of the employees can be correctly computed by the employer.

About the Author

Author is Rishabh Bhatia, ACA working as Assistant Manager- Compliances with Neeraj Bhagat & Co. Chartered Accountants, a Chartered Accountancy firm helping foreign companies in setting up business in India and complying with various tax laws applicable to foreign companies while establishing their business in India.