Introduction
Section 115 BAC of Income Tax Act was introduced by the Finance Act of 2020, offering individual taxpayers and Hindu Undivided Families (HUFs) a choice between the old tax regime with deductions and exemptions or a new tax regime with concessional tax rates but without most exemptions and deductions. This change brought significant implications for taxpayers, especially concerning tax planning and declarations made to employers for Tax Deducted at Source (TDS).
Clarification by CBDT: When the new Section 115 BAC of Income Tax Act was introduced, it raised questions about how employers should handle TDS if an employee opts for the new tax regime. To address these concerns, the Central Board of Direct Taxes (CBDT) issued Circular No.C1 of 2020, stating that employers should compute TDS based on the employee’s chosen tax regime, as communicated to them.
What is Section 115BAC?
Section 115 BAC of Income Tax Act allows individual taxpayers and HUFs to opt for a new tax regime with lower tax rates while forgoing most of the exemptions and deductions available under the old regime. This option was made available starting from the financial year 2020-21 (assessment year 2021-22).
Taxpayers can choose the new tax regime for a particular financial year, provided they do not have any business income. This option needs to be exercised while filing the income tax return under Section 139(1) of the Income Tax Act.
Tax Rates Under the New Regime
Here are the income tax slabs and rates under the new tax regime:
New Regime Tax Rates for FY 2023-24 (AY 2024-25):
| Income Slabs | Rates |
| Up to Rs 3 lakh | Nil |
| Rs 3 lakh to Rs 6 lakh | 5% |
| Rs 6 lakh to Rs 9 lakh | 10% |
| Rs 9 lakh to Rs 12 lakh | 15% |
| Rs 12 lakh to Rs 15 lakh | 20% |
| Income above Rs 15 lakh | 30% |
New Regime Tax Rates for FY 2022-23 (AY 2023-24):
| Income Slabs | Rates |
| Up to Rs.2.5 lakh | Nil |
| Rs 2.5 lakh to Rs 5 lakh | 5% |
| Rs 5 lakh to Rs 7.5 lakh | 10% |
| Rs 7.5 lakh to Rs 10 lakh | 15% |
| Rs 10 lakh to Rs 12.5 lakh | 20% |
| Rs 12.5 lakh to Rs 15 lakh | 25% |
| Income above Rs 15 lakh | 30% |
Who is Eligible for Section 115BAC?
Both individuals and HUFs can opt for the new tax regime under Section 115 BAC of Income Tax Act, provided they meet certain conditions:
No Business Income: The taxpayer’s income should not include any business income.
Exclusion of Certain Deductions/Exemptions: The income must be computed without considering the following:
- Deductions under Chapter VI-A, except Section 80CCD and 80JJAA.
- Deduction under Section 24(b) related to interest on home loans.
- Certain exemptions under Sections 10, 10AA, 16, and others.
- Additional depreciation, certain investments, and development allowances.
- Any set-off of losses from earlier years related to these deductions.
No Perks or Allowances: Exemptions or deductions for any perks or allowances are not considered.
No Depreciation Claims: The calculation is done without claiming any depreciation under Section 32.
You may also want to know Donations Under Section 80G and 80GGA
Exemptions and Deductions Under Section 115BAC
While the new tax regime eliminates most deductions and exemptions, a few are still permissible:
Deductions Not Claimable Under Section 115BAC
Here are the key deductions and exemptions that are not available under the new tax regime:
- Standard Deduction for salaried individuals.
- House Rent Allowance (HRA) under Section 10(13A).
- Leave Travel Allowance (LTA) under Section 10(5).
- Interest on Housing Loan under Section 24(b).
- Deductions under Chapter VI-A, such as 80C, 80D, 80E, except Section 80CCD (NPS) and 80JJAA (employment generation).
Conclusion
Section 115 BAC of Income Tax Act provides taxpayers with flexibility in choosing their tax regime based on their financial circumstances. While the new regime offers lower tax rates, it comes at the cost of forgoing many exemptions and deductions. Taxpayers need to carefully evaluate their financial situation to decide which regime benefits them the most. The choice should be made with an understanding of both the immediate and long-term tax implications.
Frequently Asked Questions
Can a taxpayer switch back to the old regime after opting for the new tax regime under Section 115BAC?
Yes, if the taxpayer does not have business income, they can choose between the old and new tax regimes every year while filing their return.
Is it mandatory to opt for the new tax regime under Section 115BAC?
No, it is optional. Taxpayers can choose the regime that provides the maximum benefit.
Can deductions like 80C and 80D be claimed under Section 115BAC?
No, under the new tax regime, most deductions, including 80C and 80D, are not allowed.
How can an employee inform their employer about their choice of tax regime?
Employees must notify their employer about their choice of tax regime for the employer to compute TDS accordingly.
Is the choice of tax regime the same for all financial years?
No, taxpayers can choose their preferred regime every year unless they have business income, in which case the choice may have restrictions.
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