Govt should allow salaried employees to choose tax regime for TDS on salary again for FY2024-25 However, the government has revised the income tax slabs in the July 2024 Budget. There is a need to allow salaried employees, especially those who have opted for the old tax regime, to choose their tax regime for TDS on salary again
The government changed the income tax laws under the new tax regime in the July 2024 Budget, increasing its attractiveness compared to the old tax regime. This was done by changing the income tax slabs to reduce tax payable, hiking the standard deduction to Rs 75,000 and increasing the deduction to 14% on employer's contribution to the NPS account under the new tax regime.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} However, these changes have been made in the new tax regime after almost 4 months of the financial year 2024-25 are already over. Salaried individuals have already informed, in April of this financial year, their employers about their individual choice of tax regime for deducting tax from their salaries. Employers use the tax regime chosen by the employees as the basis for calculating the TDS from each employee's salary. In the most cases, this choice has to be made in the first month of the FY as per employers' requirements. Each employee chose the tax regime favourable to him/her based on the income tax slabs under the old and new tax regimes existing at that point in time.
Latest income tax slabs in old, new tax regime for FY 2024-25
The changes in the income tax slabs under the new tax regime in the July Budget 2024 may have changed the tax regime favourable to some employees. Therefore, those who opted for the old tax regime in April 2024 may want to switch to the new tax regime for TDS on salary. This is because if their estimated tax liability as per the new tax regime is now lower than that estimated earlier under the old tax regime then TDS from their salary would also reduce if the employee switches his choice of tax regime.
In Budget 2023 too, the government had changed the income tax laws under the new tax regime. The impact of this is seen in the income tax return filing figures for FY 2023-24. As per the income tax department press release dated August 2, 2024, more than 7.28 crore ITRs for FY2023-24 were filed till July 31, 2024. Of this, 72% of taxpayers have opted for the new tax regime, while 28% remain in the old tax regime. Due to the latest changes in the new tax regime in the July 2024 budget, more individual taxpayers are expected to choose it for the current FY.
Remember that the new tax regime is the default tax regime from FY 2023-24. This would mean that individual taxpayers must specifically opt for the old tax regime to claim common deductions such as those under Section 80C and Section 80D and tax exemptions such as House Rent Allowance (HRA) and Leave Travel Allowance (LTA) to reduce their tax outgo. If an employee does not inform the employer about his/her preferred tax regime, the employer is now required to deduct TDS as per the new tax regime by default.
How much tax new income tax slabs under new tax regime can save you
In April 2023, the Central Board of Direct Taxes (CBDT) issued a circular guiding employers on how to deduct tax from employees' salaries. The circular was issued based on the changes made in the new tax regime in Budget 2023. However, the circular is silent on whether employees can switch the tax regime during the financial year with respect to TDS from salary.
Shalini Jain, Tax Partner, EY India, says, "Unless the income tax department issues a notification to the contrary, it appears reasonable that employees who had selected the old tax regime at the withholding stage by informing their employers should be given another opportunity to move back to the default new tax regime given that the new tax regime has been made even more attractive in the Finance Bill 2024."
According to chartered accountants, it depends on whether employers allow it because the circular is silent on this aspect. Change of tax regimes during the financial year by employees means recalculating the tax to be deducted at source under the two different tax regimes and determining how much more or less tax must be deducted for the rest of the financial year. Many employers may not want to give the option to switch tax regimes to their employees during the financial year as it would mean more work for the former.
As the changes in the new tax regime have been announced in July and there are eight more months before the financial year ends, the government should nudge employers to allow employees who want to switch their tax regime, for the purpose of TDS from salary, to do so.
It may be pointed out that it's likely that only some of the employees who opted for the old tax regime in April 2024 are likely to use the option to choose again if the option is offered. This is because those who opted for the new tax regime in April 2024 are likely to continue with the same tax regime as it has become even more attractive. Hence, such taxpayers may not require this option.
The CBDT normally issues a circular on TDS from salary for employers after the Finance Bill, receives the President's assent and is notified. Therefore, it is suggested that the board may nudge employers to offer the option to choose between the two tax regimes again for FY2024-25 in this circular. Else, a separate advisory could be issued for the same purpose.
What may happen if option to switch tax regime is not given during financial year
It may happen that employers do not provide an option to switch the tax regime for TDS on salary again now. Suppose a salaried individual has opted for the old tax regime for TDS on salary in April 2024. In such a case, the individual will be required to submit tax-saving proofs during the last three months of the financial year to ensure that tax-related deductions are given and consequently, less tax is deducted. If the investment proofs are not submitted, higher TDS would be deducted from the salary income as the deductions would not have been included in the calculations.Individual taxpayers can opt for the new tax regime when filing their ITRs in July 2025 for FY 2024-25 (AY 2025-26). In such cases, if TDS from salary is higher than that required under the new tax regime and the excess tax cannot be adjusted against other income, then they may have to claim income tax refund.
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This story originally appeared on: India Times - Author:Faqs of Insurances
