Overview of Section 115BAC

Section 115BAC of the Income Tax Act was introduced under the Finance Act, 2020, as part of a significant tax reform to offer taxpayers the option to choose a new tax regime with reduced tax rates. This regime is applicable to individual taxpayers and Hindu Undivided Families (HUFs). The primary objective behind Section 115BAC is to simplify tax computations by removing various exemptions and deductions while offering a lower tax rate for those who opt into the new structure.

Key Features of Section 115BAC:

• Lower Tax Rates: The section offers reduced income tax rates compared to the existing regime.
• No Deductions or Exemptions: Taxpayers opting for Section 115BAC must forgo most of the exemptions and deductions available under the Income Tax Act.
• Flexibility: The taxpayer can choose between the old tax regime with deductions or the new tax regime under Section 115BAC on an annual basis.

Tax Rates Under Section 115BAC

The tax slabs under Section 115BAC for individuals and HUFs opting for the new tax regime are as follows:

In addition to the above tax rates:

• A surcharge and health and education cess will be levied as per the usual provisions.
• The surcharge ranges from 10% to 37%, depending on the total income.

Exemptions and Deductions Not Allowed Under Section 115BAC

When an individual or HUF opts for the new tax regime under Section 115BAC, they must forgo the following exemptions and deductions:

1. Chapter VI-A Deductions

   • Deductions under sections like 80C (e.g., PF, life insurance premiums), 80D (health insurance), 80G (charitable donations), etc.
   • Deductions for interest on housing loans under Section 24(b).
   • Deductions under Section 80E for education loans.

2. Standard Deduction

   • The standard deduction of INR 50,000 available under the old regime for salaried taxpayers or pensioners is not available.

3. HRA (House Rent Allowance) Exemption

   • Exemption on HRA is not available under the new regime.

4. Other Exemptions

   • Exemptions under Section 10 like Leave Travel Allowance (LTA) and Special Allowances are also unavailable.

5. Deductions for Investment in NPS

   • Taxpayers cannot claim the additional deduction under Section 80CCD for contributions to the National Pension Scheme (NPS).

6. Tax-Free Income from Provident Fund and Gratuity

   • Tax-free income from Provident Fund (PF) and Gratuity will also be unavailable under Section 115BAC.

Note: However, some deductions like 80JJAA (employment of new employees) and deductions under Section 10(13A) for house rent received by employees can still be claimed.

Eligibility Criteria for Section 115BAC

To opt for the new tax regime under Section 115BAC, the following conditions must be met:

1. Resident Individual or HUF: Only individuals or HUFs who are residents in India are eligible to choose this option.

2. No Business Income Condition:

   • Taxpayers with business income can opt for Section 115BAC if they have income under the head “Income from Salary,” “Income from House Property,” and/or “Income from Other Sources.” However, those with business income who have opted for this scheme will not be able to claim deductions for business-related expenses under sections like 35, 35AD, etc.

3. Non-Eligibility for Specific Deductions:

   • Taxpayers opting for this regime cannot claim deductions under various sections (like 80C, 80D, 80G, etc.) that reduce taxable income.

Opting for Section 115BAC: How to Choose

• Choosing Every Year: The choice to opt for Section 115BAC can be made on a year-to-year basis.

• Income Tax Return (ITR) Filing: The option to choose the new tax regime must be exercised while filing the Income Tax Return (ITR) for the relevant assessment year.

  • Taxpayers should declare their intention to opt for the new tax regime in the ITR form.
  • If the taxpayer has business income, this choice must be communicated before the due date of filing the return for that financial year.

Advantages of Section 115BAC

1. Lower Tax Rates: The most significant advantage is the lower tax rate on income as compared to the old tax regime.
2. Simplified Tax Filing: With no deductions to be accounted for, the filing process is simpler and faster.
3. Potential Savings: For taxpayers who do not have many exemptions and deductions to claim, the new tax regime could lead to lower tax outflows.

Disadvantages of Section 115BAC

1. Loss of Deductions: The biggest disadvantage is the loss of exemptions and deductions, which may not be ideal for taxpayers who have significant deductions to claim under the old regime.
2. No Flexibility for Some Taxpayers: For those with high investments or significant tax-saving expenditures, the new tax regime may not be as beneficial.

Conclusion

Section 115BAC provides an option for individuals and HUFs to avail of a simplified and lower tax regime by forgoing most exemptions and deductions. It aims to reduce the tax burden for those who have limited deductions and provide a more straightforward tax filing process. However, the decision to opt for this regime must be carefully considered, especially for individuals who regularly claim various exemptions and deductions under the old tax system.

Taxpayers must evaluate their financial situation and determine whether the new tax regime under Section 115BAC will benefit them in terms of tax savings or if sticking to the old tax regime would be more advantageous.