• Notification Date: 08-04-2023
• Notification No: N/A

CBDT Issues Circular on TDS on Salaries for Financial Year 2023-24

The Central Board of Direct Taxes (CBDT) has issued a circular dated April 5, 2023, clarifying how employers will be deducting tax on salaries for the current financial year 2023-24. As per the circular issued, an employee is required to inform the income tax regime that he/she intends to choose for the purpose of TDS on salaries. Once the intimation is received by an employer, then tax on salary will be deducted accordingly. The employee can choose either the new or an old tax regime, at his convenience. 
 
If an employee does not inform the employer of the same, then it will be assumed that the employee has 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 has been issued by the income tax department after changes in the Income-tax Act, 1961 were announced in the Budget 2023. One of the announcements was the new tax regime becoming the default option. Till FY 2022-23 (i.e., March 31, 2023), the old tax regime was the default option, and an individual was specifically required to opt for the new tax regime. However, from 1 April 2023, onwards, the new tax regime has become the default tax regime. This means that if an individual wants to claim the benefit of tax deductions and exemptions, he/she is specifically 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 had not allowed the individual 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 income tax return only. 

ET Wealth Online spoke to tax experts to see if an individual can change the tax regime during the financial year. In layman's 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, is he/she allowed to do so? 

With the latest CBDT circular, an employee now has the option to switch income tax regimes during the financial year. However, it needs to be seen whether an employer provides such an option or not. 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 employee's salary is filed by an employer at the end of the financial year. Hence, an employee can switch the tax regime at his convenience during the financial year. The employer needs to ensure that there is no deficit in TDS on salaries for FY 2023-24. 

The latest CBDT circular is silent on whether an individual can change the income tax regime during the financial year. In our view, an employee cannot switch the tax regime - old to new or vice-versa, during the financial year. Once the tax regime is communicated to the employer, TDS on salaries will be deducted accordingly. However, an employee can choose any tax regime when filing income tax regime. 

The latest CBDT circular allows an individual to switch income tax regimes during the financial year. This was not allowed by the tax department in the old circular of April 2020. There is no restriction under the law that does not allow an individual to switch the tax regime during the financial year. Do note that an individual can opt for any tax regime at the time of filing tax return irrespective of what is opted for TDS on salary.