As proposed in the Finance Bill 2020, on satisfaction of certain conditions, a salaried employee, from assessment year 2021-22 onwards will have the option to pay tax in respect of the total income at the lower rates from financial year 2020-21 and will also have the option to choose in all future years whereas if an individual or HUF has business income, the option once exercised for a financial year shall be valid for that year and all subsequent years and cannot be changed.

Basis the condition listed, a salaried employee will have to forgo exemptions / deductions available for most of the items under section 10 (example Leave Travel Concession, House Rent Allowance exemption), Section 16 (Standard Deduction, deduction for Profession Tax), Loss from self-occupied property under Section 24 or vacant property under Section 23(2) and Section 80 (80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc.). However, deduction under Section 80CCD(2) will be available under both options, old and new.

Further, it is also proposed to remove the exemption in respect of free food and beverage through vouchers provided to the employee which is available under Section 17(2), Rule 3 if an employee opts for new rates.

While the intention is to provide simplified tax calculations (for those opting for new rates), the fact that for a salaried employee, withholding of tax is done at source by the employer which opens up few complex questions and practical challenges for both employees and employers.

When does an employee “exercise” the option since the projected taxable salary may change during the financial year?

Can an employee “switch” the option during the financial year basis change in income or investments?

How does an employee “communicate” this option to the employer?

In case an employee has multiple employers, how does the tax calculation done by one employer based on an option chosen by the employee merge with the tax calculation done by the new employer(s) based on the same or different option chosen by the employee in the new employer(s).

Can the employee switch the “option” while filing Individual Tax Returns (ITR) if it turns out to be more favourable?

In case an employee can switch the option during the financial year and / or at the time of shifting employments, it may become vital for the companies to produce tax workings in both the old and new methods showing all heads separately to allow the employee to switch to the preferred option at a later point in time, more so since some exemptions (like Section 10, Section 16 deduction for Profession Tax and exemption in respect to free food and beverage through vouchers) can only be provided by the previous employer and not by the new employer with respect to the tenure in the previous employment(s). In the absence of this information, the new employer may not be able to perform an accurate tax calculation for the employee.

We hope to get more clarity in the coming days on some of the above-highlighted points else it may cause confusion for both employees and employers in dealing with the change.

Shobha Keni is Tax Partner at EY India. With inputs from Vinayak Iyer, Director, EY India.