Budget 2024 made New Tax Regime Beneficial; Employees want to switch now, But can they?

Finance Minister Nirmala Sitharaman proposed changes in the New Tax Regime in Budget 2024 and made it more suitable or beneficial for the taxpayers. The new income-tax regime has improved and now offers more benefits than before.

Despite Finance Minister Nirmala Sitharaman’s further sweetened the deal in her Budget speech on July 23, salaried taxpayers who picked the old income-tax regime at the start of the financial year 2024-25 and want to switch to the new tax regime now are stuck.

So, can salaried individuals modify their intended investment declarations filed to employers now to indicate their intention to transition to the new tax regime this financial year?

New Tax Regime

Changes in the New Tax Regime

Income Tax Slabs: Tax slabs have been made more generous.

New Slabs as per the New Tax Regime FY 2024-25 | AY 2025-26

Standard Deduction: Standard deduction has increased from Rs.50000 to Rs.75,000.

Most salaried employees will benefit more from the new regime.

The Problem: Effect of April 2020 Circular

The tax tangle arose as a result of a notification published by the Central Board of Direct Taxes (CBDT) in April 2020, shortly after the new tax regime was announced in Budget 2020. As per the Circular, the employee is required to make declaration with employer for purpose of TDS Deduction if he is opting for provisions of section 115BAC, i.e. the New Tax Regime or not. It was also clarified in the circular that the intimation so made to the employer for the purposes of TDS deduction cannot be modified during that year.

Relevant text of the circular is given below:

Section 115BAC of the Income-tax Act, 1961 (the Act), inserted by the Finance Act, 2020 wef the assessment year 2021-22, inter alia, provides that a person, being an individual or a Hindu undivided family having income other than income from business or profession”, may exercise the option in respect of a previous year to be taxed under the said section 115BAC along with his return of income to be furnished under sub-section (1) of section 139 of the Act for each year.

The Board, in exercise of powers conferred under section 119 of the Act, hereby clarifies that an employee, having income other than the income under the head “profit and gains of business or profession” and intending to opt for the concessional rate under section 115BAC of the Act, may intimate the deductor, being his employer, of such intention for each previous year and upon such intimation, the deductor shall compute his total income, and make TDS thereon in accordance with the provisions of section 115BAC of the Act. If such intimation is not made by the employee, the employer shall make TDS without considering the provision of section 115BAC of the Act.

It is also clarified that the intimation so made to the deductor shall be only for the purposes of TDS during the previous year and cannot be modified during that year. However, the intimation would not amount to exercising an option in terms of sub-section (5) of section 115BAC of the Act and the person shall be required to do so along with the return to be furnished under sub-section (1) of section 139 of the Act for that previous year. Thus, the option at the time of filing of return of income under sub-section (1) of section 139 of the Act could be different from the intimation made by such employee to the employer for that previous year.

Further, in the case of a person who has income under the head “profit and gains of business or profession” also, the option for taxation under section 115BAC of the Act once exercised for a previous year at the time of filing of return of income under sub-section (1) of section 139 of the Act cannot be changed for subsequent previous years except in certain circumstances.

Proposed TDS Computation Declarations

Employers currently allow their employees to choose their tax regime only when they file proposed investment declarations in April, which marks the start of the financial year. Employees’ tax liability for the financial year is calculated using these declarations, and deductions are paid from their salaries each month.

Salaried individuals are permitted to choose between the two tax regimes each year, even while submitting Income Tax Returns (ITR), although notice of their decision in the form of proposed investment declarations can only be sent to the employer once.

The CBDT circular was prepared to assist employers who would have had difficulty predicting their employees’ anticipated choice of regime in advance.

Wait until ITR Filing or Revised Rules

So, hypothetically, if an employee who had deliberately chosen the old regime discovers that his or her tax liability will be lower under the new regime, he/ she will have to wait until June or July 2025 to file her return and receive a refund for the extra tax deduction.

There is logic to the proposals for adjustments, as the government wants to incentivize the new tax regime. As laws are changed in the middle of the year, there should be an option to switch tax regimes. Govt should revise the rules to provide benefits to a large number of taxpayers.

CBDT Clarification

The Central Board of Direct Taxes (CBDT) should come forward to give clarification on this matter as some of taxpayers are hunged in a situation where only some change is rules will help this problem of taxpayers.

A clarification is also expected on the circular issued in 2020, as the new I-T regime is the default setting.

“An enabling provision will be required so that employers can provide employees with the option to alter their investment declarations,” a tax expert said. Tax experts also expect a clarification from CBDT in due course.

Conclusion

With Budget 2024 changing income tax slabs, raising the standard deduction to Rs.75,000, and boosting the tax advantage on employers’ contributions to employees’ National Pension System (NPS) from 10% to 14%, some taxpayers are likely to support the new system.

Those who didn’t notify their employers of their preference (As new being default regime) or who picked the new regime in April are unlikely to experience problems.

The new tax regime made the default framework beginning with the financial year 2023-24. As a result, the change in tax rates and rules in the middle of the financial year will largely create barriers for people desiring to move from the old to the new regime.