The income of resident Indians is subject to taxation under the Income Tax Act, 1961, provided it exceeds the defined threshold. A review of income tax provisions is in the Union Budget’s domain.
High ReturnsGet Returns as high as 15%*
Zero Capital Gains taxunlike 10% in Mutual Funds
Save upto Rs 46,800in Tax under section 80 C
*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply
Accordingly, Section 115BAC’s insertion in 2020 introduced an alternative tax regime. However, taxpayers can choose between the old and new tax regimes matching one’s tax perceptions and income levels. Since the alternative tax regime did away with the range of exemptions so far enjoyed, it is necessary to study the new provisions extensively.
Section 115BAC in the Income Tax Act introduces an alternative tax regime applicable to individuals and HUF taxpayers. The stand-out critical feature of the new tax regime is a reduction in the slab rates across most income thresholds. However, the rate reduction comes at a high cost to the taxpayer, losing the range of deductions and exemptions. Therefore, it is essential to learn about the restructured income tax slabs before digging deeper into the loss of tax-saving opportunities.
Your income tax liability depends on the applicable slab rate relating to your annual income. Accordingly, the slab rates go up alongside income thresholds, and the principle remains the same for the new and old income tax regimes. The following grid explains the various applicable rates under Section 115BAC and the corresponding rates per the old regime.
|Annual Income Slab||Rate – New Regime||Rate – Old Regime|
|Up to Rs.2.5 Lakhs||Exempt||Exempt|
|Above Rs. 2.5 Lakhs and up to Rs.5 Lakhs||5%||5%|
|Above Rs. 5 Lakhs and up to Rs.7.5 Lakhs||10%||20%|
|Above Rs. 7.5 Lakhs and up to Rs.10 Lakhs||15%|
|Above Rs. 10 Lakhs and up to Rs.12.5 Lakhs||20%||30%|
|Above Rs. 12.5 Lakhs and up to Rs.15 Lakhs||25%|
|Above Rs.15 Lakhs||30%|
You have several points to ponder on the above grid. First, the rates are in the same range in both tax regimes. Second, the income spread has more value in the new tax regime, albeit with reduced tax rates.
The provision took effect from the 2021-22 assessment year and continues accordingly. Individual taxpayers and the HUF can select between the two and file applicable ITR for the financial year. Therefore, you can opt for the reduced rates subject to the satisfaction of the following conditions.
Your declared income is free from business income.
Your tax computation does not include any exemptions and deductions under the following sections and their clauses (Check for the relevant provisions under each section before opting for the alternative income tax regime):
Chapter VI-A of Form 12BB except for 80CCD and 80JJAA
Section 10 and 16
Section 32 and 33
Section 35 and 57
Tax computation without setting off any earlier assessment losses due to deductions in the mentioned clauses and sections or from house property.
Tax computation does not include exemptions and deductions related to allowances and perquisites.
You know that salaried taxpayers look forward to the deduction and exemptions under the different sections of the IT Act as a component of their financial planning. The tax-savings opportunities were substantial depending on the chosen investment vehicles. That apart, statutory provident fund and NPS contributions were automatically absorbed into the exemption limit of Rs.1.5 Lakhs per financial year under Section 80C. Accordingly, the following grid reflects the losses in tax savings against applicable lower income tax slab rates.
|Standard Deduction||Flat Rs.50000 from the gross income|
|Section 80||Significant deductions under Chapter VI-A of Form 12BB cover the maximum number and deduction amounts for computing income tax.|
|Section10 (13A)||House Rent Allowance|
|Section 10 (5)||Leave Travel Allowance or Concession|
|Section 10 (14)||Various allowances|
|Section 10AA||Exemption for SEZ unit|
|Section 16||Deduction for allowances covers entertainment, employment, and professional tax.|
|Section 24(b)||Interest on Housing Loan|
|Section 32 (IIA)||Depreciation|
|Section 32 to 35||Miscellaneous deductions|
|Section 57 (IIA)||Family pension deduction|
While most deductions and exemptions are not available under Section 115BAC, a few continue under the new regime. The amounts are not substantial, but enough to impact your potential tax liability. The list indicates some of the critical exceptions where you can claim deductions and exemptions.
Deduction for employer’s contribution to NPS under Section 80CCD (2)
Deduction for additional employee cost under Section 80JJAA
Transport allowance for Divyang employees (Differently Abled)
Conveyance allowance to cover performance of official duties
Allowances paid to the employee covering the cost of travel, tour, and transfer
Daily allowances paid to employees for specific conditions
The new tax regime under Section 115BAC is optional, and you can switch to the old in subsequent years. Therefore, consider the following points before making an informed choice.
Section 115BAC of the IT Act imposes new income tax slabs. However, only individuals and HUF come within its purview.
The new tax regime comes with significantly lower slab rates but takes away a chunk of deductions and exemptions available in the existing tax regime.
You cannot opt for the new tax regime if your gross income during the financial year consists business income component.
You need to pay an additional cess and surcharge on the tax liability at the same rate as the existing tax regime.
Finally, the choice of the new tax regime automatically gets invalid if the taxpayer fails to satisfy the terms and conditions of Section 115BAC.
Section 115BAc allows the taxpayer to choose either of the two for the applicable fiscal years. The choice is not binding in as much as you can reverse the decision in the following year. The first point is if the deductions and exemptions in the existing tax regime prove beneficial. For example, Section 80C allows a deduction claim of Rs.1.5 Lakhs per financial year. Moreover, other provisions like the standard deduction, Section 24(b), and Section 80D reduce your taxable income substantially, proving beneficial to most taxpayers.
In contrast, the new tax regime offers lower tax slabs distributed over additional income thresholds to spread the benefit of reduced rates. Moreover, it may suit taxpayers who do not have enough tax-saving investments like EPF, NSC, LIC, etc., to claim deductions and exemptions under the relevant sections of the IT Act. For them, the prospect of lower tax liability is vital.
Accordingly, understanding how the tax payout works out under the two will deliver clarity and help you choose the most appropriate. So, let us study the following grid, where the taxpayer claims a deduction of Rs 2.25 Lakhs under the following heads.
Standard Deduction: Rs.50000
Section 80C: Rs.1.5 Lac under various accounts
Section 80D: Rs.25000 against premium for health insurance
|Gross Income (Rs)||Taxable Income (Rs)||Tax Liability (Rs)||Benefit (Rs)|
|Old Regime||New Regime||Old Regime||New Regime|
|7 Lakhs||4.75 Lakhs||7 Lakhs||Nil **||37500||-37500|
|10 Lakhs||7.75 Lakhs||10 Lakhs||70200||78000||-7800|
|15 Lakhs||12.75 Lakhs||15 Lakhs||202800||195000||+7800|
|30 Lakhs||27.75 Lakhs||30 Lakhs||670800||663000||+7800|
|** Rebate of Rs.12500 under section 87A of the IT Act, 1961|
Note: The above grid reveals some interesting facts to help you decide.
The old regime suits taxpayers in the low and middle-income group, provided the taxpayer makes sufficient tax-saving investments.
With the application of deductions, the old regime saves substantially on the tax outgo.
High-income taxpayers with an annual gross income of Rs.15 Lakhs and above gain over the tax outgo, and hence, the new regime appears beneficial.
Calculate tax outgo under both the rates and decide whether to adopt Section 115BAC or not.
The introduction of Section 115BAc with reduced tax slabs indicates life without exemptions in the long run. Of course, there is no compulsion in choosing the Section 115BAC tax slabs. However, without the deductions and exemptions, your tax liability computation is much more uncomplicated. On the other hand, low and middle-income taxpayers reap the benefits of old slab rates as they patronize tax savings investment by default.
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