Many taxpayers are under the impression that once they have submitted their declaration to their employer about their preferred tax regime, they are locked into that choice for the entire financial year. This is a common misconception that needs to be clarified. Let’s delve into the legalities and practicalities surrounding this issue.
The Declaration to the Employer:
At the beginning of the financial year, employers usually ask their employees to submit a declaration regarding their income, investments, and the tax regime they prefer—either the old tax regime with deductions and exemptions or the new tax regime with lower tax rates but no deductions/exemptions. This declaration helps employers compute the tax to be deducted at source (TDS) from the employee’s salary.
Legal Standing of the Declaration:
For TDS Calculation Only:
The declaration submitted to the employer is primarily for TDS calculation purposes. It is not the final selection of your tax regime.
According to the Income Tax Act, employees can choose any tax regime while filing their Income Tax Return (ITR), irrespective of the declaration made to the employer.
Flexibility at the Time of ITR Filing:
The Income Tax Department allows taxpayers to switch between the old and new tax regimes at the time of filing their ITR. This means you have the freedom to select the regime that is most beneficial for you after considering all your income, deductions, and exemptions.
Practical Example:
At the Beginning of the Year: Suppose you declared to your employer that you prefer the new tax regime because, at that time, it seemed more beneficial.
During the Year: As the year progresses, you might make investments or incur expenses that are eligible for deductions under the old tax regime.
At the Time of ITR Filing: When you sit down to file your ITR, you realize that the old tax regime, with its deductions and exemptions, actually results in a lower tax liability than the new regime.
In this scenario, despite your initial declaration, you can choose the old tax regime while filing your ITR to take advantage of the lower tax liability.
Legal Basis:
Section 115BAC: This section of the Income Tax Act, introduced by the Finance Act 2020, allows individuals and Hindu Undivided Families (HUFs) to opt for the new tax regime. However, the choice is ultimately made at the time of filing the ITR.
Circulars and Clarifications: The Central Board of Direct Taxes (CBDT) has issued several circulars clarifying that the declaration made to the employer is not binding and the final decision can be made at the time of filing the return.
Conclusion:
It’s important to understand that the initial declaration to the employer regarding the choice of tax regime is not the final word. You have the flexibility to evaluate your financial situation at the end of the financial year and select the regime that offers the maximum tax benefit when you file your ITR. Always consider all deductions, exemptions, and changes in your income before making the final choice.
By being aware of this flexibility, you can make a more informed decision and potentially save on taxes.