The Central Board of Direct Taxes (CBDT) has issued a circular on April 5, 2023, which explains how employers will deduct tax on salaries for the current financial year 2023-24. The circular states that employees must inform their employers of the income tax regime they intend to choose for the purpose of TDS (Tax Deducted at Source) on salaries. Once an employee informs their employer, tax on salary will be deducted accordingly. The employee can choose either the new or old tax regime as per their convenience.
If an employee does not inform their employer of their chosen tax regime, it will be assumed that they have opted for the new regime. The TDS on salary will be deducted based on the income tax rates applicable under the new tax regime. The new circular was issued by the income tax department after changes were announced in the Income-tax Act, 1961 in the Budget 2023. One of the announcements was that the new tax regime would become the default option. Until March 31, 2023, the old tax regime was the default option, and individuals were required to opt for the new tax regime specifically. However, from April 1, 2023, the new tax regime became the default tax regime. This means that if an individual wants to claim the benefit of tax deductions and exemptions, they are required to opt for the old tax regime.
However, the circular does not mention whether an individual can change the tax regime during the financial year for TDS on salaries. The circular issued by CBDT in April 2020 did not allow individuals to change the tax regime for the purpose of TDS on salary during the financial year. The tax regime can only be changed at the time of filing the income tax return.
In simpler terms, if an employee has opted for the old tax regime in April 2023 and wants to switch to the new tax regime in December 2023 or vice versa, can they do so? Based on latest CBDT circular, an employee now has the option to switch income tax regimes during the financial year. However, it remains to be seen whether an employer actually provides such an option. The Finance Act, 2023, and Income-Tax Act do not have any restrictions regarding switching of tax regimes during the financial year. The TDS return with the break-up of an employee's salary is filed by an employer at the end of the financial year. Hence, an employee can switch the tax regime at their convenience during the financial year. The employer needs to ensure that there is no deficit in TDS on salaries for FY 2023-24.
The author is a Chartered Accountant with 2 decades of experience into Accounting, Taxation, Auditing, Risk & Compliance, Credit Controls, Due diligence. Currently, the author is the founder and managing partner at RRL Global services.
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