Section 115 BAC of the Income Tax Act

Introduction

Introduced in the Union Budget of 2020, Section 115 BAC of the Income Tax Act has been the talk of the town among taxpayers in India. The section pertains to the new optional tax regime for individuals and Hindu Undivided Families (HUFs) with effect from the financial year 2020-21. 

The new tax regime offers lower tax rates but eliminates various exemptions and deductions available under the old tax regime. Taxpayers must evaluate and compare the old and new tax regimes to determine which one benefits them. This blog discusses the Sec 115 BAC meaning, features, benefits, and drawbacks.
 

What is Sec 115 BAC of the Income Tax Act?

Under Sec 115 BAC of the Income Tax Act, taxpayers can choose between the old and new tax regimes. 

The new tax regime offers lower tax rates, but taxpayers cannot avail of various exemptions and deductions available under the old tax regime. However, you can claim certain exemptions such as standard deduction, exemptions related to gratuity, leave encashment, and contribution to the National Pension System (NPS under the new regime. Taxpayers must evaluate and compare both schemes and choose the one that suits them best.

Tax Rates Under 115 BAC of Income Tax Act
As part of Budget 2023, the income tax slabs have been revised under the new tax regime. Here are the new tax slabs for FY 2023-24 (AY 2024-25) under the new tax regime. The new tax rates for FY 2022-23 (AY 2023-24) are also listed below.
 

Difference between new tax regime u/s 115 BAC vs old regime

Below is a comparison of the tax rates under the new and old tax regimes for FY 2022-23 (AY 2023-24).

Who is Eligible for Sec 115 BAC?

Individuals and HUFs must pay their income tax based on the new slab rates applicable for the relevant financial year, provided their total income meets the specified criteria outlined below.

●    Business income is not included in the declared income.
●    The calculation should not incorporate any deductions or exemptions mentioned in Chapter VI-A, except those under section 80CCD/80JJAA, Section 24b, Clause (5)/(13A)/(14)/(17)/(32) of Section 10/10AA/16, Section 32(1)/32AD/33AB/33ABA, Section 35/35AD/35CCC, and Clause (iia) of Section 57.
●    The calculation should not factor in losses from past assessment years resulting from the aforementioned deductions or real estate owned by the taxpayer.
●    The calculation should not consider any exemptions or deductions for any perks or allowances.
●    The calculation should not claim any depreciation under Clause (iia) of Section 32.
 

Exemptions and Deductions of Section 115 BAC

As per income tax Sec 115 BAC of the Income Tax Act, the new income tax regime has eliminated many tax deductions. However, certain deductions listed below are still permitted.

●    Section 80JJAA deductions of additional employee costs
●    Daily allowances given to employees under specific situations
●    The reimbursement of transportation costs for disabled workers
●    Deduction for employer contributions to a pension account, as per section 80CCD(2)
●    Any reimbursement for the cost of travel, transportation, or tour
●    Conveyance reimbursement for official work undertaken by the employee
 

Exemptions and deductions not claimable under the new tax regime

Several exemptions and deductions are available under Sec 115BAC. However, the following deductions have been eliminated under the new income tax regime.

●    Subsections 32AD, 33ABA, 33AB, 35AD, and 35CCC deductions
●    Deduction for family pension under Section 57 (iia)
●    Standard deduction.
●    Major deductions under Chapter VIA (such as sections 80CCC, 80CCD, 80C, 80DD, 80DDB, 80E, 80EE, 80EEA, 80G, 80IA, etc.)
●    Allowance for Leave Travel as per Section 10 (5)
●    House Rent Allowance (HRA) under Section 10 (13A)
●    Compensation under Section 10 (14)
●    Employer/professional tax deductions and entertainment allowance deductions under Section 16
●    Depreciation under Section 32 (iia)
●    Deduction for donations to or expenditures for scientific research
●    Interest on mortgage loans under Section 24 (b)
 

What are the exemptions and deductions available under the new regime?

Certain tax exemptions can be claimed for various purposes, as outlined below.

●    Transport allowances for persons with disabilities.
●    Conveyance allowances received to cover the costs of employment-related travel.
●    The compensation received to cover the cost of travel for work-related tours or transfers.
●    Daily allowances received to cover ordinary expenses incurred during absences from the regular place of work.
●    Perquisites for official purposes.
●    Exemption on voluntary retirement under 10(10C), gratuity under Section 10(10), and leave encashment under Section 10(10AA).
●    Interest on home loan for let-out property (Section 24).
●    Gifts up to Rs. 5,000.
●    Deduction for employer's contribution to NPS account under Section 80CCD(2).
●    Deduction for additional employee cost under Section 80JJA.
●    A standard deduction of Rs. 50,000 was introduced in the Budget of 2023 under the New Tax Regime, applicable from FY 2023-24.
●    A deduction for family pension income was introduced under Section 57(iia) in the Budget of 2023.
●    The Budget of 2023 further introduced a deduction for the amount paid or deposited in the Agniveer Corpus Fund under Section 80CCH(2).

Can I choose between the new tax regime and the existing regime?

At the beginning of FY 2023-24, salaried taxpayers can choose the new tax regime and inform their employer accordingly. However, once they have made their choice, it cannot change during the financial year. They can, however, switch their choice during the income tax return filing in July 2024.

Non-salaried taxpayers must choose the new regime when filing their tax returns and do not need to declare their choice during the year. However, they cannot frequently switch between opting in and out of the new tax regime every year. A non-salaried taxpayer cannot opt back into the new tax regime after opting out.

How do I choose the new regime and plan my tax?

Regarding tax planning, selecting the appropriate tax regime at the start of the fiscal year is crucial. Taxpayers must compare the income tax liability under the new tax regime with the old one. This comparison will determine the tax regime that is the most advantageous for them. 

Once the taxpayer has selected a tax regime at the start of the year, the TDS or advance tax payable calculations with the investments will be adjusted accordingly. If a taxpayer wishes to choose the new tax regime, they must submit Form 10IE to the income tax department before filing their tax return.

Example 1: Where the new regime is better in respect of tax outflow (FY 2023-24).

For individuals with an annual income of Rs 12,50,000, opting for the new tax regime can result in a substantial benefit of Rs 38,251. Nevertheless, if additional deductions such as those for interest on housing loans for self-occupied properties, health insurance, investment in NPS, and education loans are claimed, the old tax regime may be more advantageous regarding tax savings.

Example 2: Where the old regime is better in respect of tax outflow (FY 2023-24).

In Example 2, an individual with an annual income of Rs 10 lakh claims HRA exemption and 80D deduction. In this scenario, the old tax regime is more beneficial, resulting in savings of Rs 4,659. However, if an individual claims lower deductions for tax savings towards health insurance, investment in NPS, and other tax-saving investments, the new regime may be more advantageous.

House property loss under the new tax regime

Interest on a housing loan for self-occupied properties does not qualify as a deduction, unlike the existing system's allowance of Rs. 2 lakhs. Additionally, the loss from house property cannot be offset by salary income. For let-out properties, the deduction is limited to taxable rent received in the new regime, and losses from excess interest cannot be carried forward or set off in future years.

Deductions are not allowed against business income under the new regime

The following deductions and exemptions are not allowed against business income.

●    Additional depreciation under section 32
●    Deductions for specific types of businesses under sections 33AB and 33ABA
●    Investment allowance under section 32AD
●    Expenditures under section 35 for scientific research
●    Amounts expended under 35AD as capital expenditures
●    Exemptions under section 10AA for units in special economic zones
 

Unabsorbed depreciation and business loss under the new regime

A HUF or individual cannot offset business income against brought forward business losses or unabsorbed depreciation. 

Under the new regime, deductions that relate to withdrawn deductions and exemptions will not be available.