Arjun (Fictional Character): Krishna, every employer is required to deduct TDS from the salary paid to employees whose income exceeds the basic exemption limit. What is the confusion for new financial year 2020-21?

Krishna (Fictional Character): Arjuna, Union Budget 2020 introduced an alternative taxation regime for individuals, allowing an option for lower tax rates u/s 115BAC, provided they don’t avail of certain exemptions/deductions otherwise available under the Income tax Act. Some of such exemptions/deductions are house rent allowance, interest on home loans, and investments made under Section 80C, 80D, 80CCD, etc. As the option is to be exercised at the time of filing of return, the deductor being employer was in confusion to deduct tax under which taxation regime. CBDT has issued a circular on 13.04.2020 to clear the confusion.

Arjun: Krishna, what clarification has been provided in the circular?

Krishna: Arjuna, the circular states that the employee has to intimate his option to the employer every year and upon such intimation, the employer shall compute his total income and make TDS thereon in accordance with the provisions. It is also clarified that the intimation shall be only for purposes of TDS and cannot be modified during that year. In case no such intimation is made by the employee, the employer shall make TDS as per old or normal tax rates.

Arjun: Krishna, whether an employee can change the option at the time of filing return?

Krishna: Arjuna, the circular clarifies that the intimation made to employer would not amount to exercise of option u/s 115BAC for concessional tax rates. The person shall be required to exercise the option at the time of filing of return u/s 139(1). Thus the option at the time of filing return of income could be different from the intimation made by such employee to the employer for that previous year.

Arjun: Krishna, what option is available for employees having business or professional income?

Krishna: Arjuna, Employees with business/profession income can opt for new taxation scheme only once and cannot be modified by them in subsequent years, except only once. Therefore the circular states that the intimation to employer in his case for subsequent years must not deviate from the option u/s 115BAC once exercised in a previous year.

Arjun: What are the takeaways from the above?

Krishna: Arjuna, CBDT has provided the much-awaited clarification on the applicability of the new tax regime under section 115BAC.  The employee should evaluate which option is beneficial for him and intimate his option to the employer without fail so that correct TDS is deducted from his salary. This will also ensure there is minimum mismatch in the TDS and ITR of an employee, if they exercise the same option while making the declaration to the employer and in their ITR.

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