To make it easier for the employer to deduct tax at source (TDS) from wages, employees must report their tax-saving investments at the start of each financial year, i.e. in April. However, the nationwide lockout introduced in the third week of March 2020 to control the spread of Novel Coronavirus (COVID-19), this year has postponed the filing of the investment declaration.
Moreover, in the last budget, Finance Minister Nirmala Sitharaman had declared a New Income Tax Regime having more income tax slabs with lower tax rates up to the income of Rs 10 lakh, which may be opted by anyone in a place of the existing Old Income Tax Regime.
Declaration submission has become more important this year, as in the absence of an Income Tax Regime choice, employers can not start deducting TDS on the basis of last year’s declarations and investment proofs.
As per the government-issued ordinance, employees are expected to choose the Income Tax Regime at the beginning of the year and the same will continue for the rest of the year.
Having missed the March deadline in Corona, employers may disable the option of selecting the tax system after the May payroll for all existing employees.
Once opted for, an employee can’t change the tax option during the year, however, they can change it at the time of filing of Income Tax Return (ITR).
You will also measure your overall gross profit without any deductions and also measure overall deductions taking into account relevant benefits such as – a tax-free portion of HRA, home loan interest, regular deduction, 80C benefits, health insurance premium u/s 80D, voluntary contribution to Tier 1 Account of NPS u/s 80CCD(1B), deduction u/s 80TTA/80TTB, donations u/s 80G, etc.
Once you have calculated your gross income and total deductions, you can visit the Income Tax India e-filing site and go to the ‘Tax Calculator FY 2020-21’ section on the left panel and obtain comparative tax liabilities under both Old and New Income Tax Regimes by selecting the age category and entering the estimated annual income and exemptions/deductions figures (as per the Old Regime).
After comparing the tax liabilities under both Income Tax Regimes, you should pick the lower tax liability regime to ensure that you subtract less tax from your salary at source (TDS).
In the event that you do not choose the Income Tax Regime with a lower tax liability within the prescribed timeframe, the tax will be deducted in default as per the Old Regime, even if the tax liability is greater than that, and no additional tax option will be provided during the year.
And, if you fail to pick the Income Tax Regime on time with lower tax liability, you will end up paying higher tax by TDS, if the Old Regime tax liability is higher.