Section 115BAC: Features of the new tax regime and its benefits

The Finance Act of 2020 added a new section 115BAC to the Income Tax Act, allowing individuals to select between the existing tax rates. It also allows them new concessional tax rates without taking into account statutory exemptions or deductions. A new income tax regime under Section 115BAC was introduced in Budget 2020, which can be chosen by the Individuals and Hindu Undivided Family or HUFs from the financial year 2020-21. 

On 1st February 2020, a new optional tax regime was introduced by Finance Minister Nirmala Sitharaman. People can choose to follow this one or the existing one. This regime is available for those individuals and HUFs who have lower tax rates and zero deductions or exemptions. So, let's learn all about 115BAC income tax.

Tax Rates under the Section 115BAC of the Income Tax Act

The tax rate structure for the income tax new regime has been given below -

Tax Rates under the Existing system

The following table shows the tax rates under the existing tax system -

There are 70 deductions and exemptions that are not allowed by Section 115BAC Income Tax: The New Tax Regime. The comparison analysis of tax payable under the existing system as well as the new tax regime has been done in the table given below:-

The table above clearly shows that the new tax regime for taxpayers who don't claim exemptions or deductions.

Also Read: Section 115BAA – New tax rate for domestic companies

Section 115BAC Income Tax: Features of the New Tax Regime

Deductions and Exemptions which cannot be claimed upon opting for Section 115BAC

People opting for the new tax regime are not eligible to take the benefits of the following exemptions and deductions:

1. House Rent Allowance (HRA)

2. Children Education Allowance

3. Allowance on salaries such as standard deduction, professional tax, and entertainment allowance

4. Leave travel concession (LTC)

5. Helper Allowance

6. Minor child income allowance

7. Section 24 - Interest on housing loan on the vacant or self-occupied property

8. Deductions under Chapter VI-A - Deductions under sections 80C, 80D, 80E, etc., are not available. However, the deduction under section 80 CCD(2) and Section 80JJAA are available

9. Deduction or exemption for any other allowance or perquisite

10. Deduction for Family pension income

11. Other special allowance

Deductions and Exemptions available under this income tax new regime

People can take advantage of the following deductions and exemptions despite opting for the income tax new regime:

1. Conveyance allowance obtained to cover transportation costs incurred as part of the job.
2. Amount paid to cover the expenses of travelling on an office tour
3. Transport Allowance in case of a specially-abled person.
4. Allowance for daily needs to meet the regular expenses and charges or expenses incurred due to his absence from his normal place of employment.

Choosing between the existing and income tax new scheme

• The choice on whether to choose the new income tax regime is available to the salaried employees at the beginning of the F.Y. 2020-21.
• An employee cannot change their choice after opting for the new regime income tax during a financial year. 
• The modification, however, can be made when the income tax return is filed in July 2021. The due date for filing the Income Tax Return for the F.Y. has been extended to 31st December 2021.
• If an employee does not elect the new tax system at the start of the fiscal year, the employer will deduct tax (TDS) from the previous tax regime. 
• As a result, a salaried taxpayer has the option of opting in and out each year. That implies selecting the new tax system one year and the regular tax regime the following year. 
• A non-salaried taxpayer must select the new regime when filing their tax return. They don't have to tell anyone about their decision at any point throughout the year. 
• A non-salaried taxpayer, on the other hand, cannot opt in and out of the new tax regime every year. 
• If a non-salaried person opts out of the new tax regime, they will not be able to opt in again in the future.

How can people plan their taxes and choose between the new tax regime?

It is critical to pick the tax regime at the start of the financial year for tax planning purposes. A taxpayer must compare the new tax regime's income tax to the previous regime's income tax. The investments and TDS or advance tax payable computations are done in accordance with the taxpayer's choice of the tax system at the start of the year. In addition, if the taxpayer wishes to use the new tax system, they must submit Form 10IE to the Income Tax Department before filing the return.

Examples Showing which System will be Better in which situation

Case 1 - 

Where it  is beneficial for the Assessee to choose the New Income Tax Regime i nstead of the existing system of tax

According to the example shown above, it is beneficial for the assessee to follow the new tax regime under Section 115BAC of Income Tax Act as it leads to tax savings of Rs 4,451 (Rs 1,47,451- Rs 1,43,000). However, suppose the assessee can claim further deductions such as by investment in National Pension System (NPS) or payment for education loan. In that case, the existing old system will be beneficial for the Assessee.

Case 2 - 

Where it is beneficial for the Assessee to choose Existing Tax System instead of the New Income Tax Regime

In the example shown above, it is beneficial for the assessee to follow the old existing tax system, leading to tax savings of Rs. 8299 (Rs 54,101- Rs 62,400).

In a nutshell, the new system will be more favourable to people who claim lesser deductions for tax savings, health insurance, NPS investment, and so on, as opposed to individuals who use tax-saving investments.

Individuals in the Rs 5-10 lakh income bracket will also benefit from the new regime because they can claim fewer deductions under Section 115BAC of Income Tax Act. On the other hand, those in the higher income tax bracket, earning more than Rs 15 lakh per year will be able to take advantage of the existing regime by making tax-saving investments. It's vital to remember that each taxpayer should assess their income tax, including tax-saving investments, before deciding on a tax regime.

Section 115BAC of Income Tax Act - Claiming House Property Loss 

Under the new income tax scheme, you cannot claim a deduction for interest on a home loan if you own a self-occupied property. The old system's deduction of Rs 2.00 lakh is no longer accessible under the new tax regime. Additionally, you cannot deduct the loss of Rs 2 lakh from your wage income.

You can claim a deduction for interest paid on a home loan if you have rented out a residence. As opposed to the former tax scheme, the new one under the 115BAC of Income Tax Act limits the deduction to the taxable rent collected from the property. Under the new rules, you cannot deduct a loss on a residence because of an excess of interest paid over rental revenue. You also cannot carry over a loss from a house to a future year for set-off.

New Income Tax Regime for Business - Deductions Disallowed

For the income from a business, certain deductions under 115BAC of Income Tax Act have been disallowed. These deductions are:

1. Section 32AD - Investment Allowance
2. Section 32 - Additional Depreciation
3. Section 33AB - Deductions available to manufacturing business of tea, coffee, and rubber. 
4. Section 33ABA - Deduction for the payment of deposits to the site rehabilitation fund for the companies involved in the extraction or the production of petroleum, natural gas, or both in India. 
5. Section 35 - Scientific Research Expenditure
6. Section 35AD - Capital Expenditure
7. Section 10AA - Exemption for SEZ units

Treatment for the Unabsorbed Depreciation and Business Loss in the new tax regime

In the new tax regime, the unabsorbed depreciation and the business loss cannot be set off from the business income. Any losses brought forward or unabsorbed depreciation from the earlier Assessment Years under Section 32AD, 35AD, 35CCC, 33AB, 35(2AA) shall not be allowed to be set off. They shall lapse. The deductions are no longer accessible under the regime to the extent they relate to deductions/exemptions withdrawn.

Also Read: Deductions under Section 80: Section 80C, 80CCC, 80CCD & 80D Income Tax

Conclusion

Individuals and a Hindu Undivided Family (HUFs) will benefit from a new optional tax framework under the Finance Act of 2020, which includes changed tax slabs and rates. A person or HUF may choose to compute tax on total income without considering specified exemptions or deductions while submitting his income-tax return using the new slab rates instead of the previous tax regime if certain requirements are met. It is essential for the assessees to carefully analyse the schemes and decide which one will be more beneficial for them. Both the schemes have their pros and cons. While the tax rates may be low in the new income tax regime, for opting for Section 115 BAC income tax, many deductions and exemptions have to be sacrificed, which are otherwise available. Thus, knowing all the details about both schemes is essential. We hope we have cleared your doubts regarding Section 115BAC of the Income Tax Act and its features through this article.

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