Decoding New Tax Regime of Section 115BAC

Taxation
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May 5, 2020

The Finance Minister Smt. Nirmala Sitharaman on 1st February, 2020 presented her 2nd Budget where a new optional personal tax scheme has been proposed vide a newly inserted section i.e. 115BAC applicable to Individuals and HUF only. The income tax slab rates have been reduced significantly in the new regime. However, in order to opt for the new tax regime various key income tax deductions and exemptions as mentioned in subsection (2), which are currently available under the old scheme will have to be forgone.

The following table shows the new slab rates as per Section 115BAC.

Annual Income	New Income Tax Slab Rate
Nil to Rs.2.5 lakh	Exempt
Above Rs.2.5 lakh to Rs.5 lakh	5%
Above Rs.5 lakh to Rs.7.5 lakh	10%
Above Rs.7.5 lakh to Rs.10 lakh	15%
Above Rs.10 lakh to Rs.12.5 lakh	20%
Above Rs.12.5 lakh to Rs.15 lakh	25%
Above Rs.15 lakh	30%

Eligibility criteria for the new tax regime
Individuals and HUFs will have the option to pay income tax as per section 115BAC at reduced income tax rates in AY 2021-22 provided their total income satisfies the following conditions for the relevant FY.

The declared income does not include any type of business income.
It is calculated without any exemptions or deductions provided under the following
Chapter VI-A except those u/s 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,
Clause (iia) of Section 57.
It is calculated without setting off losses from any earlier assessment year (AY) due to the above-mentioned deductions or from house property.
It is calculated without claiming any depreciation under clause (iia) of Section 32.
It is calculated without any exemption or deduction with respect to any allowances or perquisites.

Deductions allowed under Section 115BAC
While Majority of the income tax deductions have been discontinued under the new income tax regime (as mentioned in the earlier section), the following deductions are allowed:

Deduction u/s 80CCD(2) (employer’s contribution to your pension account)	Deduction u/s 80JJAA (additional employee cost)	Transport Allowance for Differently Abled Employees (Divyang)
Conveyance Allowance for Performance of Office Duties	Any Allowance for the Cost of Travel/ Tour/ Transfer	Daily Allowance given to Employees under Certain Conditions

Deductions and exemptions not allowed under Section 115BAC
The following table shows that the major income tax deductions and exemptions that have been disallowed under the new income tax regime. Please note that the new regime is optional in FY 2020-21 and you may opt for the old (existing) regime, where all of the following deductions can be claimed.

Major Deductions under Chapter VIA (u/s 80C, 80CCC, 80CCD, 80DD, 80DDB, 80E, 80EE, 80EEA, 80G, 80IA, etc)	House Rent Allowance (HRA) u/s 10(13A)	Home Loan Interest u/s 24(b)
Standard Deduction	Leave Travel Allowance u/s 10(5)	Deduction for Donation or Expenditure on Scientific Research
Allowances u/s 10(14)	Deduction for Employment/ Professional Tax u/s 16 and Entertainment Allowance	Depreciation u/s 32(iia)
Deductions u/s 32AD, 33AB, 33ABA, 35AD, 35CCC	Exemption for SEZ unit u/s 10AA	Deduction from Family Pension u/s 57(iia)

Important points to consider about the new tax regime

Section 115BAC of the Income Tax Act deals with the new income tax slab rates, which are applicable only for individuals and Hindu Undivided Families (HUFs).
Although the new regime comes with significantly reduced slab rates, it takes away a major chunk of tax deductions and exemptions that could be availed under the old regime.
The new income tax regime is optional, and you can still opt for the old (existing) income tax regime.
You cannot opt for the new regime, if you have any type of business income in the applicable FY.
The rates of surcharge and cess in the new regime are same as those in the old (existing) income tax regime.
The option to pay the income tax as per new income tax regime can become invalid for the relevant financial year, if the individual or HUF fails to satisfy any of the conditions mentioned in Section 115BAC.

Thus, the new income tax regime u/s 115 BAC may prove beneficial for the high-income group with minimal investment in tax-saving investments. However, the old (existing) regime may be better suited to the low-to-middle income group if they make sufficient investments in various tax-saving schemes. Hence, there is no set formula to decide between the two regimes. One must calculate the total tax Savings as per both the old and new slab rates before deciding whether to adopt Section 115BAC slab rates or not.

At AJSH, we assist our clients in filing their annual tax returns and computing their tax liability for the year. If you have any questions or would like to know about the new tax regime, please click here.