If an individual opts for the old tax regime for TDS on salary and claims one or more of the various deductions permitted under the regime then the amount of the deductions claimed will be shown in Form 16 if relevant proofs are submitted in time to the employer. However, if an individual opts for the new tax regime, then only standard deduction and Section 80CCD (2) deductions (if claimed and eligible) will reflect in the Form 16.
However, it may happen that an individual chooses the new tax regime for the purpose of TDS from salary at the start of the financial year but later decides to file ITR under old tax regime as that may appear beneficial at that point in time. Such individuals will have to themselves calculate the deductions to claim them and lower their tax liability. Further, the income tax department is more likely, while processing the ITR, to raise queries and request for proof and documents for the deductions claimed than in cases where the deductions are claimed via employer and reflect in the Form 16.
Also Read: Choosing wrong tax regime can lead to higher tax from salary
This problem does not arise in case of switching from old tax regime (chosen at start of FY for TDS from salary) to new tax regime at the time of filing the ITR. This is because the main two deductions (mentioned above) allowed under the new tax regime are also permitted under the old tax regime. Therefore, these two deductions would in any case show up in Form 16 which would be prepared by employer as per old tax regime.
Aarti Raote, Partner, Deloitte India, says, “If the income tax department observes a difference between the income details, exemptions and deductions as per Form 16 and those declared in the income tax return, there is bound to be some questions from the tax department because these additional deductions and exemptions will need to be justified with proofs. In most situations, taxpayers observe that in the initial processing of the ITR done by the CPC (Centralised Processing Centre) of the income tax department, such claims are generally denied, and the employee would need to file a rectification application substantiating these additional deductions.”Shalini Jain, Tax Partner-People Advisory Services, EY India, concurs, “In case of a mismatch, the individual is prone to receiving an electronic intimation from the tax authorities, which needs to be responded to with necessary information to reconcile the tax return and the Form 16.”
What should taxpayers do?
Raote suggests that taxpayers could choose to play safe and opt for the old tax regime for TDS on salary, claim all eligible exemptions and deductions, and switch to the new tax regime while ITR filing IF that is more beneficial. “This will result in fewer questions from the tax department. However, this will double the administrative work for the employee in terms of submitting proofs to the employer.”
This is because the employee will have to submit the proofs to the employer under the old tax regime, but those documents might not be used while filing ITR under the new tax regime.
Of course, the easier or better situation would be if the tax regime chosen at the start of the FY for TDS from salary is the same as the regime under which the ITR is likely to be filed.
The processing of the income tax return is likely to be smoother if the income tax return and Form 16 match in terms of the income and exemptions claimed, says Jain. “As long as the deductions are bonafide and calculated correctly, there is no harm in switching from new to the old tax regime while filing the tax return; responding to a mismatch intimation is only procedural,” she says.
In essence, while there is no hard and fast rule, choose your income tax regime carefully for the purpose of TDS from salary so that you file your ITR under the same tax regime instead of switching regimes later. This is likely to help in smoother ITR processing.
Remember, the new tax regime is the default tax regime. This means if employees do not inform their employers of their tax regime choice, tax from salary income will be deducted based on the new tax regime. Furthermore, most employers don’t allow change of tax regime during the financial year. So a salaried person opting for the old tax regime must communicate their choice to their employer.
The new tax regime does not offer most of the deductions commonly claimed under the old tax regime – such as Section 80C, Section 80D, Section 80CCD (1B) and tax exemptions on House Rent Allowance and Leave Travel Allowance. Under the new tax regime, an individual can claim a standard deduction of Rs 50,000 from salary and pension income and Section 80CCD (2) deduction for an employer’s contribution to the National Pension Scheme or NPS account. Under old tax regime, these deductions and several others can be claimed.
Opting for the old tax regime for TDS on salary: Does it result in smoother ITR processing and income tax refund claims?
Starting from April 1, salaried individuals must select a tax regime for TDS (tax deducted at source) on their salary. They need to inform their employers of their choice between the old tax regime and the new tax regime, as the employer will deduct tax from their salary income based on the chosen regime’s tax slabs.
If an individual opts for the old tax regime for TDS on salary and claims deductions permitted under that regime, the claimed deductions will be shown in Form 16 if relevant proofs are submitted to the employer on time. However, if an individual chooses the new tax regime, only standard deduction and Section 80CCD (2) deductions will be reflected in the Form 16.
In cases where an individual initially chooses the new tax regime for TDS from their salary but later decides to file the ITR under the old tax regime, they will need to calculate and claim deductions themselves to lower their tax liability. This may lead to the income tax department requesting proof and documents for the claimed deductions during ITR processing.
Switching from the old tax regime to the new tax regime at the time of filing the ITR does not pose the same issues, as the deductions allowed under the new regime are also permitted under the old regime. Therefore, these deductions will show up in Form 16 prepared by the employer following the old tax regime.
What should taxpayers do?
Taxpayers can opt for the old tax regime for TDS on salary, claim eligible exemptions and deductions, and switch to the new tax regime while filing the ITR if it is more beneficial. Ensuring that the tax regime chosen aligns with the regime under which the ITR will be filed can result in smoother income tax return processing.
Ultimately, selecting a tax regime carefully for TDS on salary can prevent the need to switch regimes later during ITR filing, leading to smoother processing.
It is important to note that the new tax regime is the default regime, and employees must inform their employers of their tax regime choice. Changes in the tax regime during the financial year may not be allowed by most employers.
Under the new tax regime, individuals cannot claim many deductions available under the old regime, such as Section 80C, Section 80D, Section 80CCD (1B), and tax exemptions on allowances. The new regime only allows for a standard deduction of Rs 50,000 and Section 80CCD (2) deduction for NPS contributions.
