TDS on salary and new income tax slabs: Here’s all you need to know

Employers can seek a declaration from employees and deduct tax at source (TDS) according to the old tax regime or the new concessional tax rates, as opted by the employee, said the Central Board of Direct Taxes (CBDT).

The income tax department has issued a clarification for those who want to opt for the new tax slabs as announced in Budget 2020 and which came into effect from April 1 this year.

The old tax slabs will also continue and people will have a choice to opt either of them. (Getty Images/iStockphoto)

The Central Board of Direct Taxes (CBDT) has said in the circular that employers can seek a declaration from employees and deduct tax at source (TDS) according to the old tax regime or the new concessional tax rates, as opted by the employee.

Section 192 of the Income Tax Act, 1961, says that every employer has to mandatorily deduct tax while paying salary to the employee. The tax rate should be in line with the applicable income-tax slab.

However, with the dual income-tax slabs and rates available to the employees for the financial year 2021, there was confusion on how tax should be deducted on salary.

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The old tax slabs will also continue and people will have a choice to opt either of them.

Whether an employee chooses the new tax regime or the old one depends on a case-to-case basis and they will have to give up on a lot of deductions that could help reduce taxable income.

Under the new tax rates, there is zero tax for income up to Rs 2.5 lakh; 5% for income between Rs 2.5 lakh and up to Rs 5 lakh; 10% for income between Rs 5 lakh and up to Rs 7.5 lakh; 15% for income between Rs 7.5 lakh and up to Rs 10 lakh; 20% for income between Rs 10 lakh and up to Rs 12.5 lakh; 25% for income between Rs 12.5 lakh and up to Rs 15 lakh; 30% for income above Rs 15 lakh.

Here are the clarifications by the income tax department:

* Employees, who do not have income from business or profession, will have to inform their employers about their intention to opt for the new tax regime for deduction of tax at source or TDS from their salaries

* They will continue to be taxed under the older slabs present in the IT act, if they do not exercise the option

* It will be applicable for the year and can’t be modified once employees inform the employer about their intention to opt for the new concessional tax rates for TDS

* According to the IT department, an employee can change the option of tax structure at the time of filing income tax return and the amount of TDS payment will be adjusted accordingly

* “The deductor shall compute his total income and make TDS thereon in accordance with the provision of Section 115 BAC of the (Income Tax) Act. If such intimation is not made by the employee, the employer shall make TDS without considering the provision of Section 115 BAC of the Act,” the department said.