• Notification Date: 13-04-2023
• Notification No: N/A

Choose the Correct Income Tax Regime to Avoid Notice from I-T Dept

According to the Central Board of Direct Taxes (CBDT), employees are required to notify their preferred tax regime to their employers at the start of the financial year. Failure to do so may result in employers deducting TDS on salary based on the New Tax Regime rates under Section 192. However, it should be noted that the declaration filed with the employer is not binding, as you can reconsider your decision at the time of filing the Income Tax Return (ITR).  

“It should be noted that the declaration filed with the employer is not absolute, as the option is exercised only at the time of filing the income tax return. Accordingly, the taxpayer can choose to file an income tax return under the old tax regime even if no declaration was filed to the employer and taxes are deducted by the employer based on the default regime i.e., the new tax regime,” said Neeraj Agarwala, Partner, Nangia Andersen India. 

However, there is a possibility that the taxpayer may receive an income tax notice from the tax department if there is a discrepancy between the income reported by the employer and the income submitted by the taxpayer in their income tax return. “The taxpayer may receive an income tax notice from the tax department in case of difference in income reported by the employer and submitted by the taxpayer in their income tax return. In this case the taxpayer should submit the documents supporting the deductions such as proof of investment under Section 80C, house interest payment etc. to the income tax department,” said Agarwala. 

For example, say an employee does not file a declaration with their employer ( and by default new tax regime is chosen) and later claims a gross deduction under 80C and HRA while filing the income tax return. In this case, the income under Form 26AS will not tally with the income tax return and the employee may receive a system-generated notice asking for information. 

In a recent circular, issued on April 5, CBDT said that if an employee doesn’t intimate about his/her choice of tax regime then the employer can deduct TDS from salary as per the rates prescribed for the default regime, i.e., New Tax Regime.  

“If intimation is not made by the employee, it shall be presumed that the employee continues to be in the default tax regime and has not exercised the option to opt out of the new tax regime. Accordingly, in such a case, the employer shall deduct tax at source, on income under section 192 of the Act, in accordance with the rates provided under sub-section (lA) of section 115BAC of the Act,” CBDT said in the circular. 

The CBDT has clarified that an employer needs to seek information from each of its employees regarding their intended tax regime whether the new regime, which offers low tax rates with no deduction of various allowances and investments, etc.) or the old regime, which permits deductions and allowances under certain sections of the Income Tax Act.  

“In order to avoid the genuine hardship in such cases, the Board, in the exercise of powers conferred under section 119 of the Act, hereby directs that a deductor, being an employer, shall seek information from each of its employees having income under section 192 of the Act regarding their intended tax regime and each such employee shall intimate the same to the deductor regarding his intended tax regime for each year and upon intimation, the deductor shall compute his total income, and deduct tax at source thereon according to the option exercised,” CBDT said.