Direct Tax Alert - CBDT issues clarification regarding tax deduction at source by employer

Background:

The Finance Act 2023 inserted section 115BAC(1A) in the Income-tax Act, 1961 (IT Act) with effect from fiscal year (FY) beginning on or after 1 April 2023 to provide for a new tax regime. Under this regime, the income tax in respect of the total income of the person shall be computed at concessional rates provided in section 115BAC(1A) of the IT Act, subject to certain conditions, including the condition that the person does not avail of specified exemptions and deductions.

From FY 2023-24, the above-mentioned new tax regime is the default tax regime, which amongst others applies to an individual taxpayer. However, section 115BAC (6) of the IT Act, provides taxpayers with an option to opt out of this regime. A taxpayer not having income from business and profession can exercise this option every year.

Given these amendments, several representations were made expressing concerns regarding the tax to be deducted at source (TDS) on salary income under section 192 of the IT Act by an employer (deductor) since they would not know if the employee (deductee) would opt out from new tax regime.  To avoid this genuine hardship faced by employers, the Central Board of Direct Taxes (CBDT) has issued a circular1 providing certain clarifications. 

We, at BDO in India, have analysed and summarised the said circular and provided our comments on its impact hereunder:

  • As per the Circular, an employer shall seek information from each of its salaried employees regarding the intended tax regime for each year for TDS purposes
  • Upon intimation from the employees, the employer shall compute such employee’s total income and tax shall be deducted according to the option exercised for the tax regime (old/new)
  • If no intimation is made by an employee, the employer shall presume that the employee continues to be under the default new tax regime for TDS purposes
  • However, such intimation to the employer would not automatically be tantamount to exercising the option in terms of section 115BAC (6) of the IT Act. The employee could still opt for another tax regime (other than the one intimated to the employer) by exercising the option separately at the time of return filing
  • This circular supersedes the earlier CBDT circular2 and shall be applicable from FY 2023-24 onwards.

BDO in India comments:

This is a welcome move by CBDT as it provides relief to employers from any undue hardship that could have arisen in the case of TDS under section 192 of the IT Act.

Employers need to ensure that necessary intimation/declaration is sought from employees as part of their payroll process i.e., at the beginning of the year for existing employees and at the start of employment for new employees.

Employees need to make an informed decision in terms of the tax outgo under each such tax regime and intimate the employer accordingly.

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