TDS on Salaries – Employer liability for FY 2020-21 and Pros & Cons of New Tax Regime for Individuals

TDS on Salaries – Employer liability for FY 2020-21 (Updated with Circular issued on 13-04-2020) and Pros & Cons of the New Tax Regime for Individuals

Finance Bill, 2020 introduced one of biggest change ever in the Direct Tax History by providing different options of calculation of Income-tax for an Individual or HUF. The Bill got the President assent on March 27, 2020 and passed without any amendment regarding the rates and procedures to be applied in respect of the Personal Taxation.

First time, the option has been given to an individual that how he/she want to calculate the tax, whether after considering all the incentives/deductions or want to enjoy the benefit of lower tax rates by forgo them.

Revenue Secretary Ajay Bhushan Pandey said that “The finance ministry expects at least 80 per cent of the taxpayers to move to the new income tax regime”. He said the government did an analysis of 5.78 crore taxpayers before the budget and found that 69 per cent of them would save on tax payouts under the new system, while 11 per cent were found to be favoring the old regime. Of the remaining 20 per cent taxpayers, there will be people who want to avoid the hassle of paperwork and may wish to switch over to the new regime, he said.

The benefits of opting for the lower tax rates in the New Tax Regime can be summarized as follows:

1. The new income tax rate is beneficial for people with low investments in policy schemes.

2. The reduced tax rate would provide more disposable income to the taxpayer.

3. It offers seven lower tax slabs the assessee has not to worry about complex filings, hence fewer mistakes in filing.

4. It’s an optional scheme so people have the flexibility to switch over from one system to other.

5. The exclusion of 70 exemptions also helps in containing income tax frauds.

However, there is no scheme/option where we can’t evaluate the other side.The cons of the new regime can be discussed as follows:

1. Salaried class people will not get much benefit in most of the cases as already eligible for some auto deduction e.g. Standard Deduction, profession tax, PPF etc. without any additional investment.

2. The new income tax regime can potentially lower household savings and also affect long term savings of an individual.

3. The new income-tax structure could discourage investments in the real estate sector being many incentives are related to investment in housing sector.

4. The insurance sector will also suffer as it will have to put more effort and money on advertisements to attract people to invest.

Employer Liability of withholding tax (which option should be used)

The option of selection has been given to an individual till the time of filing of return of income and he/she can also switch over the option in next financial year in case, he/she has no source of income from business or profession u/s 115 BAC of the Income-tax Act, 1961. However, it has put the employer in a dilemma that whether he should give an option to employee to select the new regime or not and if yes, how many times during the Financial Year.

It was expected that at the time of enacting the Finance Bill, the Finance Ministry will clarify but the Bill got passed without any discussion and today when Employer has to seek the details from employees for the deduction of tax for the FY 2020-21, the position is not clear.

Without any such clarification, the only option is to interpret the provisions of TDS u/s 192 as it stood today in the formfor the purpose of deduction of tax for salaried employee. As per my interpretation, it provides that the Employer should follow the current tax regime and should consider the incentives/deductions while calculating the TDS on payment of salaries. This interpretation is based on the following premises i.e.

1. The Finance Act, 2020, refer to section 115BAC at three places. At one place, it defines the about the details of the option and at other two places it talks only about the option available for the purpose of advance-tax, but it does not talk at any moment about the impact of the option on the TDS.

2. No amendment has been made in the provisions u/s 192 which relates to deduction of tax on payment of salaries where the responsibility of the employer has been defined for deduction of tax e.g. for addition of income from other sources or salary income from the previous employer specific provisions has been inserted in the section but any such provision has not been inserted by the Finance Act.

Whether, the above position is intentional or missed by the Finance Ministry at the time of passing the bill, however, it should come with a clarification as soon as possible. There can be a huge difference in the amount of Tax deduced on salaries and tax calculated at the time of filing of return of income by an individual in case proper clarification is not provide by the Finance Ministry in due time.

As per my advice under the above-mentioned circumstances, the Employer should continue with the current tax regime and consider the incentives/deductions while calculating the TDS on payment of salaries.

I have mentioned my advised as above in my article published on April 5, 2020. On April 13, 2020, as mentioned above, CBDT issued a circular to clarify the above position, which is more or less in line with the position which we had advise.

CBDT has issued a circular F.No.370142/13/2020-TPL Dated April 13, 2020, clarifying the liability of the employer for deduction of tax on payment of salary to employees. The gist of the same and the process we need to apply is as follows:

1. The employee should be given option to select between the current tax regime (with incentives & deductions) and new tax regime (without incentives and deductions).

2. The TDS should be deducted as per the option selected by the employee. In case, no intimation is made by the employee for selection of any option, the employer is required to deduct as per the current tax regime.

3. The intimation made by the employee is only for the purpose of TDS and can’t be modified during the year once it is made.

4. The intimation made by the employee would not amount to his final choice and the employee has option to change the choice at the time of filing of his return.

(It is to be informed to the readers that the views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author’s employer, organization, committee or other group or individual)