The new section 115BAC gives an option to an Individual and HUF to opt for the new taxation regime under which tax is payable at a lower rate compared to the old regime of taxation. However, in case the new tax regime under section 115BAC has opted, the taxpayer has to forego certain exemptions and all the deductions under chapter VI-A.
Union Budget 2020 has introduced a new section 115BAC to amend the Income Tax Act, 1961. It provides for lower income tax rates for Individuals and HUF without claiming any deduction or exemption.
The highlights of new section 115BAC are listed below-
1. Optional Scheme: The scheme of taxation prescribed in section 115BAC is optional. It means an individual or a HUF may or may not opt for this scheme and continue the old regime of taxation.
2. Applicability: Section 115BAC is applicable only to an individual or a HUF. This section will come into effect from the assessment year (AY) 2021-22.
The individual taxpayer may be a resident or non-resident, senior citizen or a very senior citizen, a male assessee or a female taxpayer.
3. No separate basic exemption limit: The tax shall be levied on total income as per the table given in the section itself. The analysis of the tax rate table reveals that the basic exemption limit is Rs. 2,50,000 across the board. Even for a senior citizen or a very senior citizen, the tax exemption slab is limited to Rs. 2,50,000 only.
4. Conditions: To claim the reduced tax rate, one needs to fulfill the conditions specified in section 115BAC(2).
(iii) In case of salary income, the total income should be computed without any exemption or deduction for allowances or perquisite, by whatever name called, provided under any other law for the time being in force.
5. Exercising the option: To exercise the option under this section, one has to inform the same to the income tax department. This can be done on or before the prescribed time limit and is based on individual or HUF's composition of income as detailed below-
The only condition is that return must be filed in time within the due date of filing of return u/s 139(1). In case a belated return is filed, then the option cannot be exercised.
4. Conditions: To claim the reduced tax rate, one needs to fulfill the conditions specified in section 115BAC(2).
Sub-section (2) provides that the concessional rate of tax shall be applicable only if the 'total income' of the individual or HUF shall be computed as stated below-
(i) The total income is computed without any exemption or deduction under the following sections-
Section
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Particulars
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Section 10(5)
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Exemption for Leave Travel Allowance
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Section 10(13A)
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Exemption for House Rent allowance
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Section 10(14)
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Exemption from any other allowance
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Section 10(17)
|
Exemption from allowance to MPs or MLAs
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Section 10(32)
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Exemption of Rs. 1,500 in case of clubbing of minor child income
|
Section 10AA
|
Exemption for newly established Units in Special Economic Zones
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Section 16
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Standard Deduction of Rs. 50,000; Entertainment Allowance of Rs. 5,000 and Professional Tax
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Section 24(b)
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Interest paid on on home loan
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Section 57(iia)
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Deduction from family pension income , equal to 33 1/3 per cent of such income or Rs. 15,000, whichever is less.
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Deduction under Chapter VI-A
Except section 80CCD(2) and section 80JJA
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Section 80C, Section 80D, Section 80CCD(1B), Section 80G, etc.
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[The above list is trimmed to show only the exemptions and deduction is related to a salaried Individual.]
(ii) The total income is computed without set-off of any loss under the head “Income from house property” with any other head of income.
A point is required to be noted that interest on home loan under section 24(b) is not allowed under section 115BAC(2)(i). It appears that loss arising from let-out house property is allowed. It is wrong. The same is restricted under section 115BAC(2)(ii)(b).
5. Exercising the option: To exercise the option under this section, one has to inform the same to the income tax department. This can be done on or before the prescribed time limit and is based on individual or HUF's composition of income as detailed below-
In case of an Individual or HUF having no business income (for example, a salaried individual), the option needs to be exercised at the time of filing of return of income (ITR) along with the ITR. This needs to be done every year.
Hence, a salaried or other individual (or HUF) having no business income has to exercise this option every year if he opts to pay tax under the new scheme.
Moreover, one may exit from the option in any year without exercising the option for that year and may re-enter into the scheme, if he wishes to opt the option in a later year.
An Individual employee shall have the option to pay tax either under the earlier rates of tax or at the new lower rates of tax under section 115BAC.
Section 115BAC and TDS by the employer
Though the section has given an option to an employee but the option is required to be exercised at the time of filing of return. For example, for the financial year 2020-21, an employee will be filing his return of income by July 2021. But he needs to plan his affairs by March 2021.
An employee is also subject to deduction of income-tax (TDS) by his employer and such tax is deducted on a monthly basis which generally begins from April. Thus, for the financial year 2020-21, the employer would start deducting income tax or TDS from April 2020.
Hence, the big question is how the employer will deduct the TDS from the salary income of the employee under the new regime of tax under section 115BAC from the beginning of the financial year?
Whether the employer should deduct the income tax from the salary income as per the old regime or as per the new regime?
How the employee will decide the option at the beginning of the year?
Does the employee need to communicate his option to the employer?
How the employee will respond to the investment declaration in Form 12BB requirement to the employer and many more questions.
Even though the law has given the option to an employee either to go for the old regime or the new regime, however, the provisions related to deduction of income tax by the employer from the salary income paid to the employee is not synchronized with the new regime of tax introduced under section 115BAC.
The statutory provisions of related deduction of income tax or TDS from the salary income of the employees by the employer under the new taxation regime introduced by section 115BAC have not been amended.
Section 192 of the Income Tax Act, 1961 contains the provisions related to deduction of income-tax or TDS on the salary paid to the employees by the employer in a financial year.
Section 192(1) provides that "Any person responsible for paying any income chargeable under the head "Salaries" shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year."
The 'rates in force' as mentioned in section 192(1) is defined in clause (37A) of section 2 of the Income Tax Act and is reproduced below-
Section 2
(37A) "rate or rates in force" or "rates in force", in relation to an assessment year or financial year, means—
(i) for the purposes of calculating income-tax under the first proviso to sub-section (5) of section 132, or computing the income-tax chargeable under sub-section (4) of section 172 or sub-section (2) of section 174 or section 175 or sub-section (2) of section 176 or deducting income-tax under section 192 from income chargeable under the head "Salaries" or computation of the "advance tax" payable under Chapter XVII-C in a case not falling under section 115A or section 115B or section 115BB or section 115BBB or section 115E or section 164 or section 164A or section 167B, the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year, and for the purposes of computation of the "advance tax" payable under Chapter XVII-C in a case falling under section 115A or section 115B or section 115BB or section 115BBB or section 115E or section 164 or section 164A or section 167B, the rate or rates specified in section 115A or section 115B or section 115BB or section 115BBB or section 115E or section 164 or section 164A or section 167B, as the case may be, or the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year, whichever is applicable ;
(ii) for the purposes of deduction of tax under sections 193, 194, 194A, 194B, 194BB and 194D, the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year ;
(iii) for the purposes of deduction of tax under section 194LBA or section 194LBB or section 194LBC or section 195, the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year or the rate or rates of income-tax specified in an agreement entered into by the Central Government under section 90, or an agreement notified by the Central Government under section 90A, whichever is applicable by virtue of the provisions of section 90, or section 90A, as the case may be;
Hence, section 2(37A) states that 'rates in force' as provided in section 192(1) shall mean the rates of income-tax as specified in the Finance Act of the relevant financial year.
For the Financial Year 2020-21, the relevant Finance Act is the Finance Act, 2020. At the time of writing this article, the Finance Bill, 2020 has not been notified and hence the provisions with reference to the Finance Bill, 2020 is discussed.
Paragraph A of Part-III of the First Schedule provides the rates of taxes for deduction of income-tax from salaries under section 192. It states that in cases in which income-tax has to be deducted from income chargeable under the head “Salaries” under section 192 of the Income Tax Act shall be deducted at the following rate or rates:-
Applicable Income Tax Slab Rates for AY 2021-22 for Individuals
Paragraph A(I) of Part-III of the First Schedule prescribes 'Rates of income-tax' for a resident Individual who is neither a senior citizen nor a very senior citizen.
Table-1
Category of Taxpayer
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Individual
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Residential Status
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Resident and Non-Resident
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Age of the Taxpayer
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Under 60 years of age
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Total Income
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Income-Tax Rate
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Up to Rs. 2,50,000
|
Nil
|
Rs. 2,50,001 to Rs. 5,00,000
|
5%
|
Rs. 5,00,001 to Rs. 10,00,000
|
20%
|
Above Rs. 10,00,000
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30%
|
Paragraph A(II) of Part-III of the First Schedule prescribes 'Rates of income-tax' for a resident Individual who is a senior citizen.
Table-2
Category of Taxpayer
|
Individual (Senior Citizen)
|
Residential Status
|
Resident
|
Age of the Taxpayer
|
Above 60 years of age
|
Total Income
|
Income-Tax Rate
|
Up to Rs. 3,00,000
|
Nil
|
Rs. 3,00,001 to Rs. 5,00,000
|
5%
|
Rs. 5,00,001 to Rs. 10,00,000
|
20%
|
Above Rs. 10,00,000
|
30%
|
Paragraph A(III) of Part-III of the First Schedule prescribes 'Rates of income-tax' for a resident Individual who is a very senior citizen.
Table-3
Category of Taxpayer
|
Individual (Super Senior Citizen)
|
Residential Status
|
Resident
|
Age of the Taxpayer
|
Above 80 years of age
|
Total Income
|
Income-Tax Rate
|
Up to Rs. 5,00,000
|
Nil
|
Rs. 5,00,001 to Rs. 10,00,000
|
20%
|
Above Rs. 10,00,000
|
30%
|
Section 2(9) of the Finance Act, 2020 provides for a surcharge on the rates of tax provided in Part-III of the First Schedule of the Finance Act, 2020 in the following manner-
Sl
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Quantum of Total Income
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Rate of Surcharge
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(a)
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Where the total income (including the income under the provisions of section 111A and section 112A ) exceeds Rs. 50 Lakh but does not exceed Rs. 1.0 Crore
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10%
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(b)
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Where the total income (including the income under the provisions of section 111A and section 112A) exceeds Rs. 1.0 Crore but does not exceed Rs. 2.0 Crore
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15 %
|
(c)
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Where the total income (excluding the income under the provisions of section 111A and section 112A) exceeds Rs. 2.0 Crore but does not exceed Rs. 5.0 Crore
|
25 %
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(d)
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Where the total income (excluding the income under the provisions of section 111A and section 112A) exceeds Rs. 5.0 Crore
|
37%
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(e)
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Where the total income (including the income under the provisions of section 111A and section 112A) exceeds Rs. 2.0 Crore, but is not covered under clauses (c) and (d)
|
15%
|
An exceptional provision is provided where the total income includes any income chargeable under section 111A and section 112A of the Income-tax Act, the rate of surcharge on the amount of income-tax computed on that part of the income shall not exceed 15 percent.
Section 2(12) of the Finance Act, 2020 provides that the income tax and surcharge, if applicable, so computed shall be increased by 4 percent as “Health and Education Cess".
Conclusion
Hence from the analysis of the above provisions, it can be concluded that an employer has no option to deduct the TDS from the salary income paid to employees as per the rates of tax specified in the Finance Act, 2020 which is as per the old regime of the taxation system.
An employer cannot deduct income tax from the salary paid to employees at the rates of tax specified in section 115BAC even if the employee opts for the new regime of taxation.
Since the employer will deduct income tax on salary as per the old scheme, the employer can consider all the exemptions and deductions while computing the estimated income of the employee for the FY 2020-21. If the employee does not submit his or her investment details and evidence with Form 12BB, certain exemptions or deductions like standard deduction, the deduction for professional tax, employee's contribution to provident fund, may be considered by the employer while computing his or her estimated income.
The option to go for the new tax regime is given to an employee in his individual capacity but no such option is available to an employer. Hence, an employer shall deduct income tax (TDS) on salary only on the basis of the old regime of taxation for the financial year. This is even the employee communicates about his option to opt for the new taxation regime.
This may lead to a difference in the reported income of the employee by the employer in certain cases. Further, there may be a short or excess deduction of tax by the employer from the salary income of the employee. Unless a synchronization is made in the Finance Act, this anomaly will continue.
Remember, there are two directions (two options for an employee) but the way is only one (for the employer).
Suggested
Readings on Section 115BAC
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