In the July 2024 budget, Finance Minister Nirmala Sitharaman introduced a key announcement related to the adjustment of TDS (Tax Deducted at Source) and TCS (Tax Collected at Source) from salaries. To implement this, the Central Board of Direct Taxes (CBDT) has issued a new Form 12BAA, allowing employees to declare tax deductions from other income sources.
What Does Form 12BAA Do?
If you belong to the salaried class and have TDS deducted every month, this update is significant for you. The new Form 12BAA enables employees to inform their employers about TDS and TCS deductions from income sources other than their salary. This includes income from:
- Fixed Deposits (FD)
- Insurance commission
- Dividends from equity shares
- Purchase of vehicles (TCS on car purchases)
By sharing this information, employees can ensure that their tax deduction from salary accounts for taxes already paid elsewhere, reducing the overall TDS deduction.
Benefits for Employees
Employers usually deduct TDS from an employee’s salary based on the investment declarations provided, considering investments and expenses eligible for tax deductions. However, taxes paid by the employee from other income sources were not previously factored into the salary TDS. Now, with Form 12BAA, employees can:
- Reduce the amount of TDS deducted from their salary
- Increase their take-home pay
- Improve their cash flow and potentially increase their savings
The CBDT notification issued on October 15, 2024, officially introduced this change.
Effective Date: October 1, 2024
The new rule requiring employees to provide information about TCS and TDS deductions from other income sources came into effect on October 1, 2024. With the introduction of Form 12BAA, employees can now declare tax deductions from sources like interest income or capital gains, which can then be adjusted by employers when calculating TDS on salaries.
How It Works
Tax expert Ashish Mishra explains that if an employee wants to reduce their salary TDS and increase their take-home pay, they can submit Form 12BAA to their employer. This form is similar to the already existing Form 12BB, which is used to declare investment-related deductions for tax purposes.
The new form allows employees to:
- Declare TDS from non-salary income sources
- Ensure tax calculations on salary are based on all income and existing deductions
This adjustment will be made by the employer under section 192 of the Income Tax Act, based on the tax regime chosen by the employee (either the old regime or the new regime).
Choosing Between Old and New Tax Regimes
Employees are free to choose between:
- Old Tax Regime: Offers deductions under section 80C, 80D, HRA, Leave Travel Allowance (LTA), etc.
- New Tax Regime: Offers a standard deduction and contributions to the NPS account, reducing TDS from salary.
The flexibility of the new form ensures that tax deductions are more accurate and that employees take home more of their salary after adjusting for taxes already paid.
Key Points at a Glance
| Aspect | Details |
|---|---|
| Form Introduced | Form 12BAA |
| Purpose | To adjust TDS and TCS from non-salary income |
| Implemented by | Central Board of Direct Taxes (CBDT) |
| Effective Date | October 1, 2024 |
| Benefits | Higher take-home pay, reduced salary TDS |
| Similar to | Form 12BB (for investment declarations) |
| Applicable to | Salaried employees with additional income sources |
| Old Tax Regime Benefits | Deductions under section 80C, 80D, HRA, etc. |
| New Tax Regime Benefits | Standard deduction, NPS contribution |
This new rule, effective from October 1, 2024, is expected to simplify the tax deduction process for employees and help them reduce unnecessary tax outflows.
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