The tax authority has introduced a new form that aims to simplify tax filings for employees with income from sources other than salaries. The Central Board of Direct Taxes (CBDT) has notified Form 12BAA, a tool designed to help salaried individuals inform their employers of taxes already deducted or collected from other income streams.

This change, effective from October 1, 2024, comes as part of the government’s efforts to ease the tax compliance burden and improve cash flow for taxpayers.

The form was rolled out following the announcement in the 2024 Budget, which aimed to streamline the process of adjusting Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) against the TDS on salaries.

Under the new rules, employees can now report income from sources like fixed deposits, insurance commissions, dividends, and TCS collected from major purchases, including automobiles or foreign currency transactions. The form also includes a section for reporting losses under the "Income from house property" category.

CBDT notified the changes on October 15, 2024. “The new form will allow employees to reduce the amount of TDS deducted from their salaries by informing their employer of taxes already paid through other sources,” said Rajarshi Dasgupta, Executive Director, Tax, AQUILAW. “This will ease cash flow issues for employees, giving them more disposable income to spend or save.”

Previously, while employers deducted TDS based on employee declarations of tax-saving investments, there was no formal mechanism to account for taxes paid on non-salary income. “Form 12BAA fills this gap,” Dasgupta added. Employees can now report taxes collected or deducted from other income sources, reducing the TDS burden on their salary.

According to tax laws, employers must deduct TDS under Section 192 of the Income-tax Act, based on the employee’s chosen tax regime—either the old regime, which allows various deductions and exemptions, or the new regime, which permits only a standard deduction and employer contributions to the National Pension System (NPS).

Rahul Jain, Partner at Khaitan & Co., highlighted the broader implications of the reform. “The Finance (No.2) Act 2024 requires employers to consider all taxes deducted or collected at source from employees when calculating TDS on salary payments,” he said. “With this new form, the CBDT has streamlined the process, making it easier for employees to report taxes deducted elsewhere and easing both compliance and cash flow burdens.”

The government’s initiative comes in response to long-standing concerns from salaried employees over managing cash flow when TDS and TCS from other income sources were not factored into salary TDS.

The Budget 2024 announcement acknowledged these issues, stating: “Representations have been received that credit of TCS paid should be allowed while computing the amount of tax to be deducted on salary income of employees, as this will help in avoiding cash flow issues. Moreover, when the TCS is not accounted for, employees are required to claim it as a refund, adding to the compliance burden.”

To address these concerns, Section 192 of the Income-tax Act was amended, allowing employees to include TDS and TCS from other sources in their salary TDS calculations. This, in turn, reduces the likelihood of employees needing to claim refunds later. “The change significantly simplifies the income tax filing process,” said Dasgupta. “All transactions can now be recorded under one form.”

However, the new rules have raised some concerns. Yogesh Kale, Executive Director at Nangia Andersen India, pointed out a potential oversight in the amended law. “Under the old provisions, employees had to declare both their other income and the TDS deducted on that income. However, the new language allows employees to declare TDS and TCS without declaring the corresponding income,” he said. “This could be an unintended consequence, and the government may need to amend the provisions to address this issue.”

Despite these concerns, the introduction of Form 12BAA is largely seen as a positive step towards simplifying tax compliance for employees, while also reducing cash flow pressures.

The government’s broader goal is to ensure that employees no longer need to deal with the cumbersome process of seeking refunds for TCS or TDS that was not adjusted at the time of salary deduction.