Favorable rates can be taken for TDS against salary


Mumbai: the Central Board of Direct Taxes () clarified in a notice issued Monday that employers can rely on an employee statement and deduct tax at source () against wage earnings based on favorable tax rates.

It should be remembered that the 2020 Finance Law had given individuals an option to opt for favorable tax rates on taxable income of up to Rs 15 lakh. However, for this, the taxpayer had to give up a series of exemptions and deductions, such as the housing rental subsidy, the travel license grant, the standard deduction, the deductions for various investments, the health insurance premium, etc.

Payroll accountants and tax professionals have appreciated this timely notification, as April is the first month that the new provisions take effect. TDS would soon be required to be deducted against April payments.

Employers anticipated a challenge due to the drafting of section 2 (9) of the Finance Act. A literal interpretation meant that employers would have to deduct the tax at the source under section 192 using normal rates and not favorable tax rates. TOI had signaled this challenge. This would have resulted in a disproportionate TDS and the employee would have had to claim a refund after filing their tax returns.

CBDT goes on to clarify that if the employee's indication of having opted for the new personal tax regime is not received, then the employer will deduct the tax at the source, without considering the provisions of Section 115BAC (favorable rates) of Income Tax. (IT) Law.

Once the employee has made the hint for a particular financial year for the purpose of TDS, it cannot be changed. However, when submitting the application, the employee may choose to change their option.