TDS on salary: How to avoid higher income tax under new, old tax regime

Many employers have asked their employees to submit proof of the investments made during the year, to avoid higher tax deduction from salary income. Unlike in the previous years, the income tax laws have a lot of changes now and some of them came into effect from April 1, 2023, for FY 2023-24. So salaried individuals must be aware of the income tax laws to know whether they are actually required to submit investment proof to avoid higher TDS from salary.

Submit proof of investments to avoid higher TDS on salaries

The requirement to submit investment proof to avoid higher tax deduction on salary income will depend on the tax regime the salaried individual has opted for. Another factor will be if the company policy allows you to switch the tax regime – from old to new or vice versa – from what was chosen in April 2023

When companies ask for investment proposals in April, employees are usually not required to submit any documents. However, in the last three months of the financial year, the finance department sends emails to employees asking for proof of investments.

Proposed declaration save you from TDS typically till first 3 quarters of the financial year which is till December. However, with beginning of last quarter of the financial year in January, companies ask employees to back their declaration with actual proofs. Do note that deduction from taxable income from January onwards is calculated on the basis of the actual investments and expenses (based on the submission of proof) and provisional investment and expenses to be incurred during the remaining part of last quarter, which is till March 31.
The new tax regime has become the default tax regime. A salaried individual has to opt specifically for the old tax regime. If this has not been done, the taxes on salary will be deducted on the basis of the new tax regime.

If salaried individual opts for old tax regime

The old tax regime offers various tax exemptions and deductions to an individual. Some of the commonly claimed tax exemptions and deductions are house rent allowance (HRA) exemption, leave travel allowance (LTA) exemption, deductions under Sections such as 80C, 80D, 80CCD(1b), 80CCD (2) and others.

Hence, if an individual opts for the old tax regime in January-March 2024, he or she would have to submit investment proof to avoid higher tax deduction from salary. The type of proof that an individual will be required to submit will depend on the tax exemptions and deductions that are being claimed.

For example, an employee is required to submit a rent agreement and rent receipts to claim tax exemption on rent paid during the year under HRA. The PAN of the landlord has to be mandatorily submitted if the annual rent paid exceeds Rs 1 lakh.

Similarly, to claim Section 80C deductions, a salaried individual is required to provide proof of the specified investments and expenditures made. This includes premium receipt for life insurance policy, statement from mutual fund house for investment made in ELSS, passbook of Public Provident Fund. Other specified expenditures under Section 80C are loan statements from banks indicating principal amount under home loan repaid in a year, fee receipts for tuition fees paid for two children.

To claim LTA exemption, flight and/or train tickets are needed. Tax experts recommend that salaried individuals should claim LTA exemption through their employers. This is because there is no clarity under income tax laws if such an exemption can be claimed at the time of filing the income tax return.

In the case of HRA, the tax exemption can be claimed either via the employer or at the time of filing the ITR.

If salaried individual opts for new tax regime

If an individual does not provide any response to the employer, then TDS on salary will be deducted on the basis of the new tax regime. If an individual opted earlier for old tax regime but fails to provide proof by the due date given by the employer, the TDS will be deducted as per old tax regime. If the employer allows an individual to change the tax regime from old (opted earlier) to new (opted now), then there will be no requirement to submit investment proofs.

Unlike the old tax regime, the new tax regime offers only two deductions to salaried employees. These are a standard deduction of Rs 50,000 and Section 80CCD (2) deduction.

Standard deduction of Rs 50,000 is a straight deduction available on salary and pension income. There is no requirement to submit any document to the employer to claim standard deduction.

From FY 2023-24, the employer automatically takes standard deduction into account from salary income while calculating taxes to be deducted from salary income under the new tax regime. Standard deduction is available under the old tax regime as well.

Section 80CCD (2) is available on employer’s contribution to the employee’s NPS Tier-I account. Here also an employer deposits money into the employee’s NPS account. Hence, usually there is no need to provide additional documents to employers as investment proof.

No other deductions are available to the salaried under the new tax regime. To be eligible for higher deduction and exemptions over and above the standard deduction and 80CCD(2).

Last date to submit investment proof

The last date for such submissions varies, but most organisations would expect you to submit the evidence by March 15. If the documents are not submitted according to tax regime opted, your employer will deduct higher TDS on salary income till the time the actual proof or investment declaration is submitted.

None of the investment proof documents are required to be submitted to the income tax department while filing income tax return. It is the employer who receives them and deducts taxes on salary accordingly.

Changes in income tax from April 1, 2023

The Budget 2023 made certain changes in the new tax regime to make it more attractive than the old tax regime. The changes in the new tax regime are:

a) Income tax slabs reduced to five, from six
b) Basic exemption limit hiked to Rs 3 lakh from Rs 2.5 lakh – an increase of Rs 50,000
c) Income tax rebate raised. Zero tax payable under new tax regime if taxable income does not exceed Rs 7 lakh in a financial year
d) Standard deduction of Rs 50,000 from salary income made available under the new tax regime
e) Highest surcharge rate reduced from 37% to 25%. This will benefit those earning more than Rs 5 crore in a year. Such individuals were previously required to pay a surcharge at 37% irrespective of the tax regime
f) New tax regime becomes default tax regime unless taxpayer specifically opts for the old regime.

What income tax department said on TDS on salary

TDS on salary income is covered under Section 192 of the Income-tax Act. Thus, an employer has an obligation to deduct and deposit taxes before making salary payments.

Due to the changes made in the Income-tax Act, the Central Board of Direct Taxes (CBDT) issued a circular on April 5, 2023, clarifying how employers should deduct TDS on salaries for the current financial year.
However, the circular is silent on whether an employee can change the tax regime during the financial year. According to tax experts, switching between the two tax regimes depends on the company’s policy.

What to do if excess tax is deducted from salary

If you miss the initial deadline to submit the investment declaration or documents, your employer will deduct excess TDS while paying the salary. In such a case, any excess tax deducted will reflect in Form 16. The individual will then have to claim income tax refund while filing the income tax return to get this excess money back.