Employees can choose new tax regime at the beginning of financial year

Individual taxpayers have the option to choose a new tax regime from the financial year 2020-21. Budget 2020 introduced the new tax regime where the individual has to declare the choice at the time of filing of the income tax return. A clarification by the income tax department states that the decision can be made at the beginning of the year and declared by the salaried taxpayers to their employers.

The regime has lower tax rates in comparison to the existing regime. However, the regime removes most tax deductions and exemptions for individual taxpayers. Salaried taxpayers in the income bracket of Rs 5 to 15 lakh can benefit from the new regime. 

The department’s clarification enables employees to intimate their choice to the employer at the beginning of the year. Once declared, the employer is bound to calculate and deduct tax as per the new regime. A choice of the regime at the beginning of the financial year will save high TDS for the salaried. Such a choice also saves the hassle of claiming refund of high TDS deducted by the employers. 

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However, if an employee does not intimate a choice of the tax regime, the employer can continue to follow the existing regime and deduct tax (TDS) accordingly. Also, irrespective of the declaration, an employee has an option to declare and follow the new regime at the time of filing of their income tax return in July 2021.

Employees should bear in mind that the new tax regime does not allow standard deduction on salaries, the deduction for tax-saving investments, house rent allowance, leave travel allowance and other exempt allowances and deductions. Hence, employees should evaluate the tax benefits under the existing and new regime before declaring their choice.

For any clarifications/feedback on the topic, please contact the writer at sweta.dugar@cleartax.in