FOR EXISTING POLICY
FOR NEW POLICY
Introduced to the Indian Income Tax Act via the Finance Act of 2020, Section 115BAC of the Income Tax Act. This act gives people a choice between old tax rates and new concessional tax rates without taking legal particulars like deductions and exemptions into account.
When Section 115BAC came into effect, it was unclear whether employees had to review the new tax system during the time of withholding taxes from salaries. The CBDT (Central Board of Direct Taxes) released Circular C1 of 2020 to solve this query. The circular clarified that an employer must compute tax deduction at source (TDS), considering Section 115BAC, wherever appropriate. This should be based on the notification received by the employer from individual employees.
What is Section 115BAC?
As per Section 115BAC, any individual or Hindu undivided family (HUF) having an income apart from income generated under a profession or business may exercise the option to be taxed for a prior year concerning the return of income to be furnished as per Section 139(1) of the Income Tax Act. This new regime would be effective from the financial year 2020-21. And it is applicable to income earned from April 1, 2020 onwards.
One of the essential features of the tax regime under Section 115BAC is the noteworthy reduction in income tax slab rates. Additionally, taxpayers opting for the new regime will have to forego various deductions and exemptions falling under the existing tax regime.
The requirement that the total income is to be computer barring specific deductions or exemptions set off of a loss, as well as additional depreciation, applies to the concessional rate offered under this new section of the Income Tax Act.
An overview of the Income Tax Slab Rates under Section 115BAC
Yearly Income |
Corresponding Slab Rates |
Between 0 to ₹ 2.5 Lakhs |
Exempt |
Above ₹ 2.5 Lakhs to 5 Lakhs |
5% |
Above ₹ 5 Lakhs to 7.5 Lakhs |
10% |
Above ₹ 7.5 Lakhs to 10 Lakhs |
15% |
Above ₹ 10 Lakhs to 12.5 Lakhs |
20% |
Above ₹ 12.5 Lakhs to 15 Lakhs |
25% |
Above ₹ 15 Lakh |
30% |
Eligibility for Section 115BAC
Hindu Undivided Families and Individuals can opt to pay their income tax as per the new income tax slab rates. Provided their total income for the financial year corresponds to the following conditions:
- Total income should not include any income from business or profession.
- Total income needs to be computed without claiming any deductions/exemptions under various sections like Chapter VIA (except 80CCD, 80JJAA), sections 24b, 10, 32, 35, etc.
- Clause (5), (13A), (14), (17), (32) of Section 10 or 10AA or Section 16
- There should be no set-off losses from past years caused by claiming the above deductions or owning a house.
- No exemptions or deductions for allowances or perquisites can be claimed.
- Depreciation under section 32(iia) also cannot be claimed while computing the total income under section 115BAC.
The following calculation is to be done without counting account losses from the past Assessment Year caused due to the abovementioned deductions. Or from any real estate owned by the individual or HUF as a homeowner.
The calculation is determined without considering any deductions or exemptions for perks and allowances.
What are the Exemptions and Deductions under the new tax regime Section 115BAC
Under this new tax regime, one can claim tax exemption for:
- The compensation received via TRA
- Exemption on voluntary retirement benefits, gratuity, leave encashment
- Interest on home loan for letting out property
- Gifts up to ₹ 50,000
While most deductions are discontinued under the new income tax regime. Some allowable deductions under Section 115BAC are as follows:
- A standard deduction of ₹ 50,000 (in effect from FY 2023-24)
- Deduction as per Section 80JJA for additional employee cost
- Deduction for family pension income as per Section 57(iia)
- Transport allowance received by a differently abled person
- Conveyance allowance to meet conveyance expenses incurred as employment part
- Daily allowance received to meet ordinary regular charges incurred due to absence from duty
- Perquisites for official purposes
- An employer's contribution to the NPS account [Section 80CCD(2)]
Old vs New: Which income tax regime is better?
The new regime benefits individuals and HUFs within an income bracket of ₹ 5 to 10 lakh. It is ideal for tax-saving and lower deduction claims. Individuals and HUFs with an income bracket of over ₹ 15 Lakh income per year will benefit from the old income tax regime.
Conclusion
Section 115BAC allows taxpaying individuals to opt for a lower tax slab rate. However, it is important to consider the multiple deductions and exemptions that one has to let go of when choosing the new tax regime.
Consider all the aspects mentioned in this blog to make a well-informed decision about choosing the new or old tax regime under Section 115BAC of the Income Tax Act.
