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Clarification Required on Deduction of Tax From Salary Under Section 115BAC

Written by gkkedia Dt. June 11th, 2020

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The Finance Bill 2020 received President’s consent on 27 March 2020. New sections were introduced and some original sections has been amended in the Finance Act, 2020. One of the newly introduced section is 115BAC.

Section 115BAC which provides an option to individuals and HUF to opt for lower rate of tax instead of normal tax rate subject to the condition that they have to forgo various exemptions and deductions including standard deduction which were previously available.

Option u/s 115BAC can be exercised by the individual or HUF at the time of filing of return. Therefore, an individual or HUF can either opt to pay lower taxes under section 115BAC or at normal tax rates.

However, this has created a dilemma in the mind of employers who are liable to deduct tax at source under Section 192 on monthly basis at the average rate of tax computed on their salary income on the basis of rates in force.

In this case, the provision has to be interpreted and read with section 2(9), first proviso and eleventh proviso to this sub section 2(9) and Part III of Finance Act, 2020. The complete reading will make it understandable that that the employer has not actually been given an option to deduct tax at source by computing tax as per the reduced rate of tax.

Sections mentioned above have been decoded as follows:

  • As per Section 2(9), tax under section 192 gets deducted by the employer at the rates in force. The rates in force are specified in Part III of First Schedule and as per First Schedule of Part III, the normal rate of tax is applicable to an individual and not the lower rate as provided in the section 115BAC.
  • As per the first proviso to said section 2(9), it is stated that liability to pay advance tax in respect of income to which Chapter XII of Income Tax Act, 1961 applies shall be computed in accordance with the rate specified in the relevant section. This new section 115BAC of lower rate of tax on individual and HUF subject to foregoing the exemptions and deductions falls in this Chapter XII.
  • Further, as per eleventh proviso to this section 2(9) of Finance Act, surcharge is to be included on the advance tax computed in accordance with the lower rate under this new section 115BAC.

Accordingly, while there is a reference to pay advance tax at the rate prescribed in section 115BAC, while there is no reference in regard to deduct tax at source at the rate prescribed in section 115BAC.

Issues related to this are explained as follows:

  • After the complete reading, this is getting interpreted that the employer has not been given an option to deduct tax at source by computing tax by applying this new lower rate of tax under section 115BAC and left with an option to deduct the tax according to the normal rates only. However, this will create an anamoly.
  • In many cases, the income computed by employer and reported in 26AS will not match with the income declared by the employee in case such employee has opted for new rates provided under section 115BAC.
  • Further, there may be various cases where tax deducted will be higher than the tax payable causing undue paper work besides blocking of the money of the employees as they have to claim for refunds. Similarly, there may be cases where tax deducted is less than tax payable by the employees which will attract interest on advance tax under section 234A, 234B and 234C.

Therefore, the Central Board of Direct Taxes should issue the clarification immediately and employer should obtain a declaration in the beginning of the year itself from their employees whether they will like to opt for new tax rates of tax as specified in section 115BAC by forgoing the exemptions and deductions or they wishes to follow normal tax rate.

If employees who opt for new tax rates, the employer be required to deduct tax at source as per the new tax rates so that tax payable by employees and tax deducted by the employer can match to certain extent.

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