Are you an Income Tax payer and have paid your income tax skillfully in the recent past? This blog describes the CBDT clarification on section 115BAC of income tax act.
The Indian tax system underwent a significant change with the introduction of Section 115BAC of the Income Tax Act, offering taxpayers a choice between the old and new tax regimes. This new regime provides reduced tax rates but restricts several deductions and exemptions. This article explains the tax slab rates, eligibility, allowed and disallowed deductions, and guidance on choosing the right tax regime.
What Is Section 115BAC of the New Tax Regime?
Section 115BAC of the Income Tax Act allows individuals and Hindu Undivided Families (HUFs) to opt for concessional tax rates under the new tax regime. However, to avail of these lower rates, taxpayers must forgo most exemptions and deductions available under the old tax regime. This section was introduced through the Finance Act, 2020, and is applicable from the Assessment Year (AY) 2021-22 onwards.
Income Tax Slab Rates Under Section 115BAC
Section 87A Rebate: Individuals with taxable income up to ₹7,00,000 are allowed a rebate under section 115BAC for the tax payable and cess. The rebate allowed does not exceed Rs. 25,000.
Eligibility Criteria for Section 115BAC of the Income Tax Act
Section 115BAC of the Income Tax Act, introduced as part of the Finance Act 2020, provides an alternative tax regime for individual taxpayers and Hindu Undivided Families (HUFs). It offers lower tax rates but requires the taxpayer to forgo several exemptions, deductions, and rebates.
Here are the eligibility criteria for availing of the benefits under Section 115BAC of the Income Tax Act:
1. Type of Taxpayer
- Individuals: This includes all individual taxpayers, whether salaried, self-employed, or otherwise.
- Hindu Undivided Family (HUF): HUFs are also eligible under this section.
2. Income Range
The alternative tax regime applies to taxpayers whose total income is above the basic exemption limit.
3. Forgoing Deductions and Exemptions
- To opt for the lower tax rates under Section 115BAC, taxpayers must forgo several exemptions and deductions available under the Income Tax Act. This includes:
- Chapter VI-A deductions (e.g., under Sections 80C, 80D, 80G, etc.).
- House Rent Allowance (HRA).
- Special Allowances.
- Standard Deduction on salary income.
- Interest on home loan (under Section 24(b)).
- Other exemptions or deductions such as for children’s education, rent-free accommodation, etc.
The key point is that opting for Section 115BAC means no exemptions can be claimed from the above.
4. Income Sources
The taxpayer’s income can include any of the following:
- Salary/Income from business or profession.
- Income from capital gains.
- Income from other sources like rent, dividends, etc.
5. Ineligibility for Certain Benefits
- Taxpayers claiming deductions under certain sections like 80E (Interest on Education Loans) or 80G (Donations to Charitable Organizations) will not be eligible to opt for the new regime.
- Taxpayers who have income from business and profession and wish to opt for Section 115BAC need to fulfill specific conditions regarding the maintenance of books of accounts and audit requirements.
6. Opting for the Regime
- Taxpayers have the option to choose between the old tax regime (with deductions and exemptions) and the new regime (under Section 115BAC).
- For Salaried Individuals: If they are opting for this regime, they must inform the employer in advance since the tax regime affects the tax calculations.
- Once chosen, the taxpayer must adhere to the new tax regime for that financial year. However, they can opt-out in the following year if they wish to return to the old regime.
Who Is Not Eligible for Section 115BAC?
The following taxpayers cannot opt for Section 115BAC:
- Firms, LLPs, and Companies – These entities follow different concessional tax rates under separate sections.
- Co-operative societies – They have a different concessional tax rate under Section 115BAD.
For business income taxpayers, once they opt for the new tax regime, they cannot switch back to the old regime in subsequent years unless they discontinue their business
How to Opt for Section 115BAC?
-
For Salaried Individuals
- Can choose between the new and old tax regimes each financial year.
- Selection is made at the time of filing the Income Tax Return (ITR).
- Employers may ask for tax regime preference at the start of the financial year for TDS calculation, but employees can still choose a different regime while filing ITR.
- Form 10-IE is not required for salaried individuals.
-
For Business and Professional Income Taxpayers
- Must make a one-time, irrevocable choice to opt for the new tax regime.
- To opt for the new tax regime, they must submit Form 10-IE before filing ITR.
- Once chosen, they cannot switch back to the old regime in future years unless they discontinue their business operations.
Exemptions & Deductions Allowed Under 115BAC Of Income Tax Act
Under the new tax regime introduced in Section 115BAC, most traditional deductions and exemptions are not available. However, a few benefits are still permitted:
| Deduction/Exemption | Allowed Under 115BAC? | Details |
| Employer’s contribution to NPS (Section 80CCD(2)) | Allowed | Up to 10% of salary (14% for government employees), contributed by the employer to the employee’s NPS account. |
| Transport allowance for specially-abled persons | Allowed | Available for differently-abled individuals to cover travel expenses. |
| Standard deduction on family pension income | Allowed | Family pensioners can claim ₹15,000 or 1/3rd of pension, whichever is lower. |
| EPF/ NPS employer contribution (not employee’s contribution) | Allowed | Employer contributions to EPF, NPS, and superannuation funds continue to be tax-free within prescribed limits. |
Exemptions & Deductions Not Allowed Under the New Tax Regime
Under Section 115BAC, business owners and professionals can still claim certain deductions, unlike salaried individuals who lose most benefits.
- Depreciation of Business Assets – Allowed as per existing tax rules.
- Deduction of Business-related Expenses – Includes rent, salaries, utilities, and operational costs.
- Presumptive Taxation Benefits under Sections 44AD, 44ADA, and 44AE – Small businesses and professionals can still avail of these.
- Employer’s Contribution to NPS for Employees – Can be deducted as a business expense.
Note: Business owners cannot claim deductions under Section 80C, 80D, home loan interest, or standard deduction, similar to salaried individuals
How to Choose Between the Old & New Tax Regime?
With the introduction of Section 115BAC, taxpayers have the option to choose between the old tax regime, which allows various deductions and exemptions, and the new tax regime, which offers lower tax rates but restricts deductions. The choice depends on individual income levels, deductions claimed, and long-term tax-saving goals.
Who Should Choose Section 115BAC?
The new tax regime benefits taxpayers who do not claim significant deductions or exemptions and prefer lower tax rates with simplified compliance.
Best Suited for:
- Salaried employees without major tax-saving investments
- Those who do not invest in PPF, ELSS, EPF, or life insurance under Section 80C.
- Employees who do not claim House Rent Allowance (HRA) or Leave Travel Allowance (LTA).
- Individuals with minimal deductions and a simple tax structure benefit from the lower rates.
- Freelancers and Self-employed individuals
- Self-employed individuals do not receive benefits like standard deduction or HRA, making the lower tax rates attractive.
- Individuals with lower income levels (₹7.5 lakh to ₹12 lakh)
- If deductions under 80C, 80D, and home loan interest are minimal, the new regime offers a lower tax liability.
- For incomes below ₹7 lakh, no tax is payable due to the rebate under Section 87A in the new regime.
- Retirees or pensioners with limited deductions
- Senior citizens who do not have large deductions like 80C or home loan interest may find the new tax regime beneficial.
Who Should Stick to the Old Regime?
The old tax regime is better for taxpayers who rely on deductions and exemptions to reduce their taxable income.
Best Suited for:
- Individuals with high 80C investments (₹1.5 lakh per year)
- Those contributing to PPF, ELSS, EPF, NSC, life insurance, and Sukanya Samriddhi would lose out on major tax savings under the new regime.
- Homebuyers with ongoing home loans
- Home loan interest deduction under Section 24(b) (₹2 lakh per year) is not available in the new regime.
- Taxpayers with high-interest outgo on home loans benefit more under the old regime.
- Taxpayers with health insurance and medical expenses
- Section 80D deductions (₹25,000 for self & family, ₹50,000 for senior citizens) are not available in the new regime.
- Those paying medical insurance premiums should continue with the old regime.
- High-income earners (₹15 lakh and above) with multiple deductions
- Taxpayers earning ₹20 lakh or more who utilize 80C, 80D, home loan interest, and NPS deductions may find the old regime more beneficial.
- Loss of deductions on education loans (80E), savings account interest (80TTA), and donations (80G) makes the old regime attractive.
Tax-Saving Scenarios (With Sample Calculations)
Scenario 1: Salary Earner with ₹12 Lakh Annual Income
| Details | Old Regime (₹) | New Regime (₹) |
| Gross Salary | 12,00,000 | 12,00,000 |
| Standard Deduction | (-50,000) | Not Allowed |
| 80C Deduction (ELSS, PPF, etc.) | (-1,50,000) | Not Allowed |
| 80D Deduction (Health Insurance) | (-25,000) | Not Allowed |
| Home Loan Interest Deduction (Section 24b) | (-2,00,000) | Not Allowed |
| Taxable Income | 8,75,000 | 12,00,000 |
| Tax Payable (After Cess) | ₹39,000 | ₹39,000 |
Verdict:
- The tax liability is the same under both regimes at ₹39,000.
- The decision depends on whether the taxpayer prefers claiming deductions (old regime) or simplified tax filing (new regime).
Scenario 2: High-Income Earner (₹25 Lakh) With Heavy 80C Investments
| Details | Old Regime (₹) | New Regime (₹) |
| Gross Salary | 25,00,000 | 25,00,000 |
| Standard Deduction | (-50,000) | Not Allowed |
| 80C Deduction (PPF, NPS, etc.) | (-1,50,000) | Not Allowed |
| 80D Deduction (Health Insurance) | (-50,000) | Not Allowed |
| Home Loan Interest Deduction (Section 24b) | (-2,00,000) | Not Allowed |
| Taxable Income | 20,50,000 | 25,00,000 |
| Tax Payable (After Cess) | ₹3,66,600 | ₹2,44,400 |
Verdict:
- The new regime saves ₹1,22,200 in tax compared to the old regime.
- High-income taxpayers without significant deductions benefit more from the new regime due to lower tax rates.
Government’s Long-Term Plan
- The new tax regime is expected to become the default choice in the future.
- The government has removed the requirement to file Form 10-IE for salaried individuals, simplifying the shift to the new regime.
- The old regime may be phased out gradually, making it crucial for taxpayers to plan.
- Those relying on home loan interest deductions and 80C savings should prepare for a tax system without these benefits.
Conclusion
Section 115BAC provides lower tax rates but removes key deductions and exemptions. Taxpayers must evaluate their eligibility, deductions, and potential tax savings before making a decision. The new tax regime benefits those with minimal deductions, while the old regime is more suitable for high earners with significant tax-saving investments. If you’re unsure about which regime suits you best, professional tax assistance can help optimize your tax strategy. Vakilsearch provides expert guidance on tax filing, deductions, and compliance—contact them today for hassle-free tax assistance.
FAQs
Who is eligible to opt for Section 115BAC, and what types of income can be included?
Individuals and Hindu Undivided Families (HUFs) can opt for Section 115BAC. It applies to income from salary, business, profession, capital gains, house property, and other sources. Firms, LLPs, and companies are not eligible for this regime.
How do I choose between the old and new tax regimes under Section 115BAC?
Choose the new tax regime if you do not claim significant deductions like 80C, 80D, or home loan interest and prefer lower tax rates with simplified filing. The old regime is better if you have multiple deductions, as it reduces taxable income despite higher tax rates.
What deductions and exemptions must I forgo if I opt for Section 115BAC?
You must forgo deductions like 80C (PPF, ELSS, EPF, Life Insurance), 80D (Health Insurance), 80E (Education Loan Interest), and Section 24(b) (Home Loan Interest). Exemptions like House Rent Allowance (HRA) and Leave Travel Allowance (LTA) are also not available.
Do employers consider Section 115BAC when deducting taxes from salaries (TDS)?
Yes, employers calculate TDS based on the tax regime selected by the employee at the beginning of the financial year. However, salaried individuals can change their tax regime while filing ITR, even if a different choice was made for TDS purposes.
Can I change from the old tax regime to Section 115BAC in any given year?
How does Section 115BAC impact carryover losses from previous years?
Under the new tax regime, business losses and unabsorbed depreciation from previous years cannot be set off. If you have carryover losses, opting for 115BAC may result in a higher tax burden due to the loss of set-off benefits.
Can I revert to the old tax regime if I opt for Section 115BAC this year but find it less beneficial?
