Blog

Simplified Tax Regime – a Circular from the Income Tax Department

The Government of India has introduced Section 115BAC in the Income Tax Act (with effect from tax year 2020-21), which allows you to opt for lower tax rates at which your salary can be taxed. The lower tax rates are specified under what is referred to as the “Simplified Tax Regime”. The below table presents the tax rates for your information.

You can choose either the “Simplified Regime” or the “Old Regime” for FY 2020-21. If you opt for lower tax rates (Simplified Regime) you will have to forego pretty much all the exemptions/losses/deductions which are available otherwise. For example, under the Simplified Regime, no benefits are available under Section 80C (Life insurance premium, etc.), Section 80D (Mediclaim premium), Section 80E (Interest on education loan), House Rent Allowance, Leave Travel Allowance, other allowances, Standard Deduction, losses on house property on account of home loan interest, etc. This means that you would lose almost all the tax benefits which are available by way of exemptions/deductions, if you opt for lower tax rates (Simplified Regime).

In case you wish to claim deductions/exemptions, the existing tax rates and slabs (Old Regime in the above table) will continue to apply.

How should you make the choice between the Simplified Regime and the Old Regime?

To state the obvious, you should choose that regime which minimizes your annual tax liability. That in turn would depend on your gross salary and your investment declaration.

A Circular Issued by the Income Tax Department

The Income Tax Department, by way of a circular dated 13-Apr-2020, has clarified on certain issues related to the selection of the tax regime by employees. The key points in the circular are as follows.

a. The tax regime, once chosen, cannot be modified during the year

An employee cannot change the tax regime for the year once they make a choice and inform the employer of the same. For example, if an employee decides to opt for the Simplified Tax Regime and informs their employer of the same, the employer will have to use the Simplified Tax Regime for that employee until the end of the year.

Hence, if you are an employee, please choose the tax regime carefully.

b. A different tax regime can be chosen at the time of filing the tax return

As an employee, you can specify a tax regime in your tax return which is different from what you have communicated to your employer. For example, if you opt for the Simplified Tax Regime for the purpose of calculating tax (deducted by your employer) on your salary, you can, while filing your tax return, can opt for the Old Regime and calculate your income tax for the year accordingly.  

c. What if an employee does not communicate the choice of tax regime to the employer?

As per the circular, the employer should deduct tax as per the Old Regime in case an employee does not communicate the choice of tax regime to the employer.

d. In case an employee has income assessable under “Profits and Gains of Business or Profession”..

Please note that if you have income assessable under “Profits and Gains of Business or Profession” in addition to salary income, you cannot change the tax regime even in the subsequent years until you cease to have income assessable under Profits and Gains of Business or Profession.

Once you enter your investment declaration online, HRWorks calculates tax under both regimes and displays the same. You can then select the regime which is most beneficial (the least tax option) to you. In the screenshot below, you can see that HRWorks has calculated tax under both regimes. In the below example, the employee should select the “Old Regime” which is the lower tax option.