Intimate Your Employer About Tax Regime You Want to Choose for FY 2020-2021

The Union Budget 2020 introduced a new optional tax regime for individuals and Hindu Undivided Families (HUFs), effective from Financial Year 2020-21 (Assessment Year 2021-22). This significant change requires employees to make an important decision and communicate it to their employers to ensure correct Tax Deducted at Source (TDS) calculations.

Understanding the Two Tax Regimes

Old Tax Regime (Existing Regime)

• Allows various deductions and exemptions under:
• Section 80C (up to ₹1.5 lakh)
• Section 80D (health insurance)
• Section 24(b) (home loan interest)
• HRA exemption
• LTA exemption
• And many other deductions
• Higher tax rates but lower taxable income due to deductions

New Tax Regime (Optional from FY 2020-21)

• Lower tax rates with reduced slabs
• No deductions or exemptions available (except Section 80CCD(2) for employer's contribution to NPS)
• Simplified tax calculation
• Must be chosen at the beginning of the financial year

Why Intimate Your Employer?

1. Correct TDS Deduction

Your employer calculates and deducts TDS from your salary based on your tax regime choice. If you don't intimate your preference:

• Employer will assume you're continuing with the old regime
• TDS will be calculated with deductions and exemptions
• If you later opt for new regime, you may face higher tax liability
• If you want new regime but TDS calculated on old regime, you'll have excess TDS deducted

2. Avoid Year-End Tax Surprises

• Proper intimation ensures correct TDS throughout the year
• Prevents large tax payments or refunds at year-end
• Helps in better cash flow management

3. Compliance Requirement

• While not mandatory, it's highly recommended
• Ensures alignment between your tax planning and TDS deductions
• Helps avoid interest and penalty on advance tax shortfall

How to Intimate Your Employer

Step 1: Make Your Decision

Before intimating, carefully evaluate:

• Your Deduction Eligibility: Calculate total deductions available under old regime
• Tax Liability Comparison: Compare tax under both regimes
• Investment Plans: Consider if you'll make investments eligible for deductions
• Financial Goals: Align with your overall financial planning

Step 2: Submit Declaration

Submit a written declaration to your employer/HR department stating:

• Your choice of tax regime (Old or New)
• Effective from April 1, 2020 (FY 2020-21)
• Your signature and date

Step 3: Provide Supporting Documents

For Old Regime:

• Investment declarations (Section 80C, 80D, etc.)
• HRA documents (if applicable)
• Home loan interest certificates (if applicable)
• Other deduction proofs

For New Regime:

• Simple declaration of opting for new regime
• No investment proofs required

Step 4: Update if Needed

• You can change your choice during the year in certain circumstances
• Inform employer immediately if your situation changes
• Update investment declarations if opting for old regime

Key Considerations

When to Choose Old Regime

• You have significant deductions available (₹2-3 lakh+)
• You're making investments in tax-saving instruments
• You have home loan interest payments
• You're eligible for HRA exemption
• Your effective tax rate is lower with deductions

When to Choose New Regime

• You have minimal or no deductions
• You prefer simplicity over tax planning
• Your tax liability is lower under new regime
• You don't want to make mandatory investments
• You have limited tax-saving options

Important Points to Remember

1. One-Time Choice: Generally, you need to choose at the beginning of the year 2. Salaried Employees: Must intimate employer for correct TDS 3. Business Income: Choice applies to all income sources 4. Cannot Switch Easily: Changing regime during year has restrictions 5. Form 10IE: May need to file this form if opting for new regime

Tax Slab Comparison (FY 2020-21)

Old Regime (with deductions)

| Income Slab | Tax Rate | |-------------|----------| | Up to ₹2.5 lakh | Nil | | ₹2.5 lakh - ₹5 lakh | 5% | | ₹5 lakh - ₹10 lakh | 20% | | Above ₹10 lakh | 30% |

New Regime (without deductions)

| Income Slab | Tax Rate | |-------------|----------| | Up to ₹2.5 lakh | Nil | | ₹2.5 lakh - ₹5 lakh | 5% | | ₹5 lakh - ₹7.5 lakh | 10% | | ₹7.5 lakh - ₹10 lakh | 15% | | ₹10 lakh - ₹12.5 lakh | 20% | | ₹12.5 lakh - ₹15 lakh | 25% | | Above ₹15 lakh | 30% |

Action Items

1. Evaluate Both Regimes: Calculate tax liability under both options 2. Make Decision: Choose the regime that benefits you most 3. Intimate Employer: Submit written declaration before or at the start of FY 4. Provide Documents: Submit necessary proofs if choosing old regime 5. Review Periodically: Monitor your tax situation during the year

Conclusion

Intimating your employer about your tax regime choice is crucial for correct TDS deduction and smooth tax compliance. Take time to evaluate both regimes based on your financial situation, investments, and deductions available. Make an informed decision and communicate it clearly to your employer at the beginning of the financial year.

For personalized guidance on choosing the right tax regime and optimizing your tax liability, consult with a qualified Chartered Accountant who can help you make the best decision based on your specific circumstances.