Every year when the budget of the country is announced in the month of February, the citizens of the country are glued to their televisions to get updates on the latest tax laws and their impact on them. The budget of 2020 was quite awaited, especially by the lower and middle class population as well as small traders to know what are the relief measures that will be announced by the Government for them. Among the many relief measures and changes in the tax laws announced by the government, one of the significant changes was the introduction of the new tax regime.
This tax regime is aimed to provide tax relief to the taxpayers and to reduce the burden of compliance. Given below are the brief details about this section and its impact on taxpayers.
What is Section 115BAC?
Section 115BAC was introduced in the Finance Act 2020 by Honourable Finance Minister Nirmala Sitharaman. This section is targeted at individual taxpayers and HUFs. As per the provisions of this section, the taxpayers can pay tax on their taxable income at a reduced rate. This benefit is available subject to fulfilling certain conditions specified under this section. Tax under this section is also levied based on a slab rate structure like the old tax regime.
Applicable slab rates under section 115BAC
As mentioned above, the new tax structure is also based on slab rates. Given below is the comparison between the slab rates under the new tax regime and the old tax regime.
|Tax Slabs||New tax regime||Old tax regime|
|Up to 2,50,000||0%||0%|
|From 2,50,001 to 5,00,000||5%||5%|
|From 5,00,001 to 7,50,000||20%||10%|
|From 7,50,001 to 10,00,000||20%||15%|
|From 10,00,001 to 12,50,000||30%||20%|
|From 12,50,001 to 15,00,000||30%||25%|
The above slab rates are exclusive of the cess and surcharge as per the old tax regime. The basic exemption limit under the new tax regime for individuals, senior citizens and super senior citizens is Rs. 2,50,000. Taxpayers also have the benefit of rebate under section 87A. This rebate is offered to resident individuals who do not have taxable income more than Rs. 5,00,000. The rebate available under section 87A is up to Rs.12,500.
Eligibility for section 115BAC
The new tax regime is applicable to individuals and HUFs from AY 2021-22. The conditions to be met for the eligibility of section 115BAC are mentioned below.
- This scheme can be opted by an individual or HUF who do not have any business income
- The option to avail benefit under this section is also available to persons having business income provided they fulfill certain conditions.
It is important to note that the eligible taxpayers have to select the option to pay tax as per the new regime at the start of the financial year. Once the option is selected, it cannot be changed for that year or for the subsequent years. However, the option to avail, the new tax regime will become invalid if the taxpayer fails to meet the conditions specified under section 115BAC.
Applicability of deductions under section 115BAC
Section 115BAC has a specific list of deductions that are allowed and disallowed under this section. Given below is the list of such deductions.
- Deductions not allowed under section 115BAC
- Standard deduction U/s. 16(ia) of Rs. 50,000/-
- Leave Travel Concession (LTA) [Section 10(5)]
- Standard deduction in case of family pension U/s. 57(iia)
- Interest on Housing Loan [ Available Rs. 2,00,000/ max on two self-occupied properties] Section 24(b)
- Deduction U/s. 80C to 80U [ employers’ contribution towards NPS U/s. 80CCD (2), deduction U/s. 80JJAA and Deduction U/s. 80LA(1A) are allowed]
- Minor Child income rebate Rs. 1500/-pm [ section 10(32)]
- House Rent Allowance (HRA) [Section 10(13A)]
- Special Economic Zone [ Section 10AA]
- Additional depreciation U/s. 32(1)(iia)
- Entertainment Allowance U/s.16(ii)
- Capital Expenditure pertaining to specified businesses U/s. 35AD
- All Special Allowances except,
- Travelling Allowance
- Transfer Allowance
- Conveyance Allowance for official purposes; and
- Transport Allowance to an employee who is blind or deaf or dumb or orthopaedically handicapped [Rs. 3200/-pm u/s. 10(14)].
- Allowance to MPs/MLAs [Section 19(17)]
- Exemption of perks [ Free Food and non-alcoholic beverage (i.e., Rs. 50.00 /meal)
- Professional Tax Paid U/s. 16(iii)
- Investment Allowance in case of backward areas U/s. 32AD
- Tea/Coffee Development Fund Allowances U/s. 33AB
- Site Restoration Fund Allowance U/s. 33ABA
- Deduction for Scientific Research Section 35(1)(ii)/(iia)/(iii) & 35(2AA)
- Agriculture Extension Project U/s. 35CCC
- Deductions allowed under section 115BAC
Deductions available under section 1154BAC are mentioned below.
- Exemption pertaining to payment of Gratuity U/s. 10(10)
- Exemption pertaining to Leave Encashment U/s. 10(10AA)
- Exemption pertaining to payment received under life insurance policy U/s. 10(10D)
- Exemption pertaining to payment from Super Annuation Fund U/s. 10(13)
- Exemption pertaining to Commutation of pension U/s. 10(10A)
- Exemption pertaining to payment including withdrawal from NPS U/s. 10(12A)/(12B)
- Exemption pertaining to Retrenchment Compensation Scheme U/s. 10(10B)
- Exemption pertaining to payment scheme of voluntary retirement /separation U/s. 10(10C)
- Exemption pertaining to tax paid by the employer on non-monitory perks U/s. 10(10CC)
- Exemption pertaining to interest and withdrawal from RPF U/s. 10(12)
How to select between new and old tax regimes?
The difference between the new tax regime and the old tax regime is in the applicable slab rates as well as the deductions that are allowed under each scheme. Taxpayers have to select the scheme based on the final tax liability under each option.
Below is an example of the calculation of tax to be paid under both the regimes which can be used to better understand the impact of this amendment on taxpayers.
|Particulars||Old tax regime||New tax regime|
|Taxable income||Rs. 6,00,000||Rs. 6,00,000|
|(-) basic exemption||Rs. 2,50,000||Rs. 2,50,000|
|Taxable income after Basic exemption limit||Rs. 3,50,000||Rs. 3,50,000|
|Applicable Tax rate||5% on Rs. 2,50,000 + 20% on Rs. 1,00,000||5% on Rs. 2,50,000 + 10% on Rs. 1,00,000|
|Tax liability||Rs. 32,500||Rs. 25,000|
In the above example, the tax payable is higher in the case of the old tax regime than the new tax regime. However, there are other points to be considered here like the deductions under Chapter VIA, various allowances like HRA, standard deduction, home loan interest deduction, etc. Such deductions and exemptions may ultimately result in lower tax liability under the old regime. Hence it is advisable to calculate the tax liability under each scenario before making a decision to choose a tax structure.
Related provisions under section 115BAC
Apart from the above provisions, there are certain other provisions that are also applicable to individuals and HUFs under the new scheme of taxation. The details of the same are given below.
- Previous losses
Under the new tax structure, the assessee will not be allowed to carry forward or set off the past losses if such past losses are pertaining to any deductions that are excluded from the purview of section 115BAC.
Brought forward depreciation will be deemed to have been given full effect and will not be allowed to be deducted in subsequent years. The current year’s depreciation (except additional depreciation) will be accounted for to calculate the total taxable income under the new tax regime.
As per provisions of section 115BAC, the provision of section 115JC relating to minimum alternate tax will not be applicable. The accumulated MAT will lapse and will not be eligible to be carried forward for set off in future years.
The provisions of section 115BAC were introduced to provide ease of tax payment for the majority of the taxpayers. However, there is no set formula to determine the applicability of the new tax structure on a particular category of taxpayers. It is essential that the taxpayers calculate the net tax liability under both the tax structures to get a clear idea of the preferred tax structure.
1. Is it necessary to file the tax return on time to opt for a new tax structure?
Yes. It is necessary for the taxpayers to file the tax return on time as per section 139(1).
2. Can a person withdraw from the new tax structure?
Yes. The provisions of section 115BAC allow the taxpayer to withdraw from the new tax structure only once.
3. Is HRA allowed to be deducted under the new tax regime?
No. Taxpayers cannot claim HRA under the new tax regime.
4. Is exemption for gratuity available under section 115BAC?
Yes. Taxpayers are allowed to claim an exemption for gratuity under section 115BAC.