CBDT Clarification on Section 115BAC of Income Tax Act

The Finance Act 2020 has inserted a new section 115BAC of Income Tax Act, wherein an individual gets an option to choose between the actual tax rates and the new concessional tax rates without considering prescribed exemptions or deductions. However, given the introduction of this new Section 115BAC, there had been a lack of clarity on whether an employer can review the new tax regime at the time of withholding taxes from salary. To address such queries, the Central Board of Direct Taxes (CBDT) vide Circular No.C1 of 2020 issued a clarification that an employer, based on intimation received from the individual employee, should compute the tax deduction at source (TDS) by considering the provision of Section 115BAC of income tax, as applicable.

Section 115BAC of Income Tax Act

The new Section 115BAC of Income tax Act, 1961 provides that a person, being an individual or an undivided Hindu family (HUF) having income other than income from profession or business, may exercise the option concerning of a previous year to be taxed under the Section 115 BAC along with his/her return of income to be furnished under Section 139(1) of the Income-tax Act for each year. The concessional rate provided under section 115 BAC is subject to the condition that the total income needs to be computed without specified exemption or deduction, set off of a loss, and additional depreciation.

Key Points of the CBDT Clarifications on Section 115BAC

The Key points of the clarifications issued by CBDT regarding 115BAC of income tax act are as follows:

If the Taxpayer is an employee and he has income other than that received from the organization. He intends to get a concessional rate under Section 115 BAC should intimate the detector each previous year.
In case the employee fails to make the intimation, the employer shall make TDS without considering the provisions of Section 115 BAC.

The New optional Tax Regime

As per the Finance Act, 2020, a new optional tax regime is provided for individuals and HUF with modified tax slabs and rates. On satisfaction of prescribed conditions, an individual or HUF may opt to compute tax in respect of total income without considering prescribed exemptions or deductions, while filing his Income-tax return as per the new slab rates, instead of the existing tax regime. Know more about the applicable tax rates for the Individuals and HUFs opting new Section 115 BAC

Withholding taxes from salary

It is worth noting that every employer responsible for payment of salary is required to withhold tax on such salary paid to their employees based on the rates in force for the financial year (FY) in which the payment is made. The rates for deducting income tax from income chargeable under the head ‘Salaries’ is the actual tax rates. Given this, there has been a lack of clarity on whether an employer can consider the new tax regime at the time of withholding taxes.

Intimation of Opting New Tax Regime by an Employee

In this regard, CBDT has clarified that a taxpayer having income need to intimate his employer regarding the intention of opting for a new tax regime at concessional rates without considering prescribed exemptions or deductions. Such intimation, once made by an employee, cannot be modified during the relevant financial year. Consequently, the employer would have to compute the total income and deduct TDS as per the new tax regime.

In case the employee does not make any intimation to the employer, then the employer would be required to compute total income and deduct TDS as per the old tax regime.
The intimation to the employer would not amount to exercising the option in terms of section 115BAC (5) of the Act. Thus, the option of filing the return during that period may be different from the intimation made by the employee to his employer for that particular financial year.

Section115BAC for Taxpayer having Business Income

Further, in case of Taxpayer having a business income, option once exercised would be applicable for all subsequent financial year and such taxpayers would have to intimate to the employer, as applicable. The intimation once made cannot be changed for the subsequent financial year except under prescribed circumstances.