Nearly four months into the financial year 2024-25, the recent budget introduced some key changes in the new tax regime. This has left salaried individuals in a quandary as they had already declared their preferred tax regime to their employers at the start of the fiscal year. The disclosing of preferred tax regime to the employer at the beginning of a financial year serves as the basis for TDS calculation on an employee’s salary. With the financial year well underway, a pressing question is – will the government allow taxpayers to revisit and change their tax regime for FY 2024-25 after mid-year budget changes?
Why is it necessary for the employee to intimate the tax regime to the employer?
As per the income tax guidelines, the employee has to intimate the employer regarding his intended tax regime during the year. If the employee does not make an intimation, 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. Thus, the employer shall deduct tax in accordance with the rates provided under Section 115BAC. However, the intimation made to the employer would not amount to exercising the option in subsection (6) of section 115BAC for opting out of the new tax regime. The employee shall be required to do so separately before the due date specified under section 139(1) for filing of return of income.
Mid-Year Tax Regime Switch: Should the CBDT clarify rules to allow flexibility for employees?
Employees would have made their tax regime choice between the old or new scheme by July 2024, when the Finance Bill No. 2 was introduced, following an interim budget in February due to the impending general elections. If no choice was communicated, employers were required to default to the new scheme as per a CBDT circular from April 2023.
Ashish Mehta, Partner at Khaitan & Co., said that although the circular does not explicitly allow or prohibit a mid-year switch, employers might consider accepting changes and adjusting TDS accordingly. To eliminate any ambiguity, the CBDT could issue a specific clarification permitting such mid-year changes, he added.
“In any case, employees do have a choice to opt between schemes at the time of filing return of income irrespective of what was communicated to the employer earlier, however if the employee wishes to opt for the old scheme in the tax return, the tax return will need to be filed within the due dates prescribed under section 139(1) of the Income Tax Act,” Mehta explained.