The new income tax regime became the default option available to all taxpayers – including salaried employees – from financial year 2023-24, which began on April 1. While the new tax regime is now the default option, individuals can still opt for the old income tax regime.
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Only people not having an income from business or profession can exercise this option every year, according to a recent clarification issued by the Central Board of Direct Taxes (CBDT).
The CBDT’s clarification came after concerns were raised regarding TDS deductions on salary, since some employees may want to opt for the old income tax structure and not the new one.
The CBDT has directed the deductor (employer) to seek information from each of its employees regarding their preferred tax regime, and each employee has to intimate the same to the deductor, based on which total income, and TDS will be determined.
Simply put, employees may have received or will soon receive an email from their employer’s account or payroll department asking them about their preferred tax regime for FY2023-24.
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Why is it important?
This is important as salaried individuals are required to declare their preferred tax regime to employers, so their TDS can be deducted accurately
However, in a scenario where an employer has not yet sought details, employees need to notify their employer about their preferred tax regime before the end of this month.
Failing to do so can lead to TDS deduction by the employer under the new income tax regime. This could particularly impact people who have the investments to claim significant deductions under the old income tax regime. And this could ultimately lead to a lower monthly salary due to higher TDS.
“If intimation is not made by the employee, it shall be presumed that the employee continues to be in the default tax regime and has not exercised the option to opt out of the new regime,” CBDT said.
In such a scenario, the deductor or employer shall deduct tax at source in accordance with the rates provided under sub-section 1(A) of Section 115BAC of the Act.
Although an employee can change the tax regime at the time of filing ITR, not intimating the employer about their preference in April could lead to complications.
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For example, if an employee has not opted for the old tax regime at the beginning of the year (April 2023), he/she will not be able to claim deductions such as HRA or LTA even if they chose the old regime. This is because the employer will not include these deductions in your salary structure.
