Section 115BAC of the Income Tax Act: New Tax Regime Deductions Allowed, Exemption List & Benefits
The Indian Income Tax Act has witnessed critical amendments as Section 115BAC was brought into the Finance Act 2020. The section has provided individual taxpayers and Hindu Undivided Families (HFU) with an alternative to a new tax regime, which allows these to be charged at reduced rates of tax.
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The Indian Income Tax Act has witnessed critical amendments as Section 115BAC was brought into the Finance Act 2020. The section has provided individual taxpayers and Hindu Undivided Families (HFU) with an alternative to a new tax regime, which allows these to be charged at reduced rates of tax.
What is Section 115BAC: New Tax Regime?
Section 115BAC of the Income Tax Act incorporated in the Finance Act 2020 has provided an option to individual and HUF taxpayers to seek either the old tax rates or a new reduced tax regime. Though tax rates lower than the previous system would be accepted, the loss of virtually all the deductions and exemptions that would otherwise be available under the old tax structure would theoretically ease tax computation and make compliance easier.
Taxpayers who avail of Section 115BAC shall ensure that their total income does not constitute income from business or profession. They can claim a general deduction of ₹75,000 on their return. They would, however, lose the clause deductions under sections such as 80C, 80D, etc. It is expected that this section would make filing easier and faster for individuals and give an added compulsion towards transparency in collecting taxes.
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Key Features of Section 115BAC
- Voluntary Tax Regime: Section 115BAC permits individuals and HUF the option to opt between old and new tax regimes, with flexibility based on financial cases.
- Lower Tax Rates: Under the new regime, the tax rates for different slabs of income are far lower, thereby hoping to decrease the total tax incidence on the taxpayers.
- Deductions Not Allowed: The taxpayer will now have to forego several deductions, such as 80C, and 80D, and exemptions like HRA and LTA, thus further simplifying the tax calculations.
- Standard Deduction: The new regime allows for an underlying standard deduction of ₹75,000 which shall offer relief but will consume more documentation.
- Annual Choice: Taxpayers can scrutinize their affairs annually and decide to continue or revert back to the old system.
- Simplified Computation of Taxation: The new system simplifies the computation of tax since it eliminates some of the complexities with respect to several deductions and exemptions that may be involved. It will also be easy for individuals to file their taxes.
Benefits of Choosing Section 115BAC
The advantages of this newly introduced selectivity under Section 115BAC include the following, which can even make tax compliance easier and reduce the overall tax burden:
- Reduced Tax Rates: The main advantage of choosing this new regime is a cut in tax rates under different slabs, which can save much for many people.
- Tax payment: With fewer deductions and exemptions, the tax filing process is relatively easier. The process is less cumbersome and less likely to contain errors upon filing.
- Predictive tax liability: The slab structure will enable the taxpayer to precisely estimate the amount of their tax liability at a time when they are not subject to various exemptions that reduce their taxable income.
- Flexibility in Choice: Taxpayers can review the situation each year and choose, if that financial year is beneficial, under the new regime or the old regime.
- Promotes Savings: Although some very popular savings instruments might not qualify for inclusion in this regime, it does encourage saving through NPS sort of instruments where contributions are still deductible.
What are the Tax Rates under New Tax Regime?
Under Section 115BAC of the Income Tax Act, the tax rates for the new regime for the financial year 2024-2025 (assessment year 2025-2026) are as follows:
- Salary up to ₹3 lakh: 0% (Tax-exempt)
- Salary from ₹3 lakh to ₹6 lakh: 5%
- Salary from ₹6 lakh to ₹9 lakh: 10%
- Salary from ₹9 lakh to ₹12 lakh: 15%
- Salary from ₹12 lakh to ₹15 lakh: 20%
- Salary above ₹15 lakh: 30%
This new tax regime provides lower tax rates but requires taxpayers to give up various deductions and exemptions that are available under the old tax system.
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Deductions Allowed Under Section 115BAC
Under the new tax regime, though many deductions are disallowed, certain specific deductions remain still available. Some of these are:
- Part 80CCD (2): employer contribution under the National Pension Scheme.
- Section 80JJAA: Deductions for additional wages paid to new employees in some specific sectors are also permitted.
Exemptions List under Section 115BAC
Taxpayers who avail the option of section 115BAC will have to forego the following exemptions:
- House Rent Allowance: In the new regime, no exemptions of HRA are allowed.
- Leave Travel Allowance: Deduction for travel expenses while on leave is not allowed.
- Deduction under Sec. 80C: The investments under the Public Provident Fund, Equity Linked Savings Scheme, and other savings instruments similar to those would fall under Section 80C under the head of the deduction.
- Section 80D: Insurance premium is not deductible.
- Under Section 24 (b): Interest on Home Loans: Deductions have been made disallowed.
- Standard Deduction: Allowed standard deduction of ₹75,000. It is the only deduction permitted under this new tax regime.
- Other Chapter VI-A deductions: Most of the Chapter VI-A deductions have not been permitted except to the extent of certain specific provisions as contained under this new tax regime such as the contribution of employers towards NPS
- Professional Tax: All professional taxes paid have not been allowed as permissible under this new tax regime.
- Depreciation on Assets: Deduction for travel expenses while on leave is not allowed.
- Carry Forward of Losses: Taxpayers are unable to carry forward losses in previous years resulting from disallowed deductions.
Conclusion
Section 115BAC of the Income Tax Act is a far-reaching change in approach toward individual taxpayers filing returns in India. It manages to offer lower tax rates but reduces many of the traditional deductions and exemptions available to taxpayers. This simplifies the scheme of taxation for taxpayers, making them likely to be more compliant. This must, however, be carefully weighed against any financial situation of an individual to decide if the new regime works for their goals and is the best possible benefit. It is these provisions that would eventually allow taxpayers to make informed decisions regarding their future taxation strategies.
About the Author
Parul Bohral
Legal Content WriterParul Bohral, a BALLB graduate and experienced legal researcher and content writer with expertise in various legal areas, including corporate law and intellectual property. I have gained valuable experience in esteemed legal environments, where I have strengthened my research skills, allowing me to approach legal writing with precision and depth.
As a legal content writer, I am committed to delivering work that not only informs but also engages readers. By staying informed about the latest trends in content marketing and regulatory developments, I ensure that my writing remains sophisticated and meets industry standards. My dedication to thorough research enables me to craft content that is both insightful and impactful.
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