Section 115BAC of Income Tax Act - Features and Benefits of New Tax Regime

In the 2020 budget, Finance Minister Nirmala Sitharaman introduced the Finance Act, which included a new tax regime under Section 115 BAC of the Income Tax Act. This allowed individual and HUF taxpayers to choose between the regular (old) tax rates or the new tax regime at lower rates, albeit without certain deductions or exemptions. The 2023 budget has also made changes to the Income Tax slabs under the new regime, which will apply to income earned from 1st April 2023 onwards (FY 2023-24/ AY 2024-25).Let’s take a look at the new tax slabs under the new tax regime:

In the budget of 2023, FM Nirmala Sitharaman also introduced a tax rebate on income of Rs. 7 Lakhs under the new tax regime. This is not applicable in the old tax regime. Individuals and HUFs who have income below Rs. 7 lakhs can get a full exemption from paying any tax.In the case of the old tax regime, a tax rebate on income under Rs. 5 lakh is applicable where a taxpayer having income under Rs. 5 lakhs do not require to pay any tax.Now let us take a look at the applicable tax rates for FY 23-24 as per the old tax regime and the new tax regime.

Individuals and HUFs have the choice to pay their income tax according to the new tax regime on the condition that their total taxable income in a particular financial year satisfies the following conditions which are mentioned below:

• Chapter VI-A except those under section 80CCD (2)/ 80JJA,
• Section 24(B)
• Clause (5)/ 13(A) / (14)/ (17)/ (32) of Section 10 or Section 10AA or Section 16
• Section 32(1)/ 32AD/ 33AB/ 33ABA
• Section 35/ 35AD/ 35CCC
• Clause (iia) of Section 57

• The declared income does not include any business income.
• The total income is determined without claiming any depreciation under clause (iia) of Section 32.
• The declared income is calculated without any exemptions or deductions that are provided below
• The calculation of the total income is done without setting off the losses from any earlier assessment year (AY) caused by the aforementioned deductions or from real estate owned by the homeowner.
• The total income is calculated without any exemptions or deductions with respect to any allowances or perquisites.

As you might have noticed, the tax rates under the new tax regime have been significantly reduced but this comes at the cost of the unavailability of some popular income tax exemptions and deductions available in the old tax regime.

Following is the list that notes some of the most common deductions and exemptions that have been excluded in the new tax regime.

• Major deductions under Chapter VIA like 80C, 80CCC, 80CCD (except 80CCD (2), 80DD, 80DDB, 80E, 80EE, 80EEA, 80G, 80IA, 80TTA, 80TTB, etc.
• House Rent Allowance ( HRA ) u/s 10(13A)
• Home Loan Interest on a self-occupied property or vacant property i.e., Section 24(b)
• Professional Tax and Entertainment Allowance on salaries.
• Leave Travel Allowance (LTA)
• Minor child income allowance
• Children education allowance
• Allowances under section 10(14)
• Donation to political party/trust, etc.
• Employee’s own contribution to NPS
• Exemptions or deductions for any other perquisites or allowances

• Deduction under section 80CCD (2) i.e., Employer’s contribution to your NPS account
• Deduction for additional employee cost (Section 80JJA)
• Standard deduction of Rs. 50,000 ( newly introduced in the budget of 2023 )
• Transport allowance in the case of a specially abled person.
• Conveyance allowance for performance of Office Duties.
• Any allowance for the cost of Travel on Tour or Transfer.
• Perquisites for official purposes.
• Daily allowance received by employees under certain conditions.
• Home Loan Interest on a let-out property i.e., Section 24.
• Gifts up to Rs. 5,000
• Exemption on voluntary retirement under section 10(10C), gratuity under section 10(10), and Leave encashment under section 10(10AA).
• Deduction under section 57(iia) for expenses towards income from family pension ( newly introduced in the budget of 2023 ).
• Deduction on amount paid towards Agniveer Corpus Fund under section 80CCH (2) ( newly introduced in the budget of 2023 ).

Before we move on to compare some examples of tax payable under the old tax regime and the new tax regime in various situations, let’s summarise Section 115BAC under which a new tax regime was introduced.

• The new tax regime brings along new income tax slab rates, only applicable to Individuals and Hindu Undivided Families (HUFs).
• The new tax regime is the default tax regime. But individuals and HUF can still opt for the old tax regime.
• Although the new tax regime has brought income tax rates that are significantly reduced as compared to the old tax regime, this benefit has come with a cost of several common deductions and exemptions being discontinued in the new tax regime.
• No tax is payable if an individual or HUF has an income below Rs. 7 lakhs as per the newly introduced rebate.
• The highest surcharge rate has been reduced to 25% under the new tax regime.

The following table shows the tax payable under the old tax regime and the new tax regime without claiming deductions and exemptions except for the standard deduction of Rs. 50,000. Also Read - Old vs New Tax Regime - Which One to Pick? *Income is after the standard deduction of Rs. 50,000 The above example was taken to show the tax comparison for someone who doesn’t claim deductions or exemptions. Now let’s also take a look at an example where deductions and exemptions are claimed.

Example 1: Detailed Comparison between both tax regimes

Example 2: Summarised Comparison between both tax regime

*Tax Payable is calculated without adding Educational Cess at 4% With the examples, you might have got an idea about some major differences between the old and new tax regime and some of the changes that the new tax regime brings. The new tax regime under section 115BAC proves beneficial to taxpayers having income with minimal investment in tax-saving instruments and the old tax regime proves beneficial to taxpayers having income in tax-saving schemes. So, the answer to which one is better than the other really depends on the case of a particular taxpayer that is being discussed. So, it is always a wise choice to calculate tax liability as per the old tax regime and the new tax regime before making a choice between them. Frequently Asked Questions

Do I have the option to choose between the old tax regime and the new tax regime? And can I shift back and forth from one regime to another?

If you are a salaried taxpayer, then you have the option to choose the tax regime at the beginning of the financial year. Once selected you cannot shift to another tax regime anytime during the financial year. But you still can change your choice of tax regime while filing the income tax for that particular year. So yes, you can shift between the tax regimes on year-to-year basis (choose one in the current year and the other in the second year and so on) but not in between.If you are a non-salaried taxpayer, then you do have the choice to shift to the new tax regime while filing your income tax. But you cannot shift from one tax regime to the other every year. You only get to choose the new tax regime once. If you opt out of the new tax regime in the next year, you cannot opt for it again in the future.

I have an income from business in the current financial year. Can I choose the new tax regime? Do I need to know some important things for business income in the new tax regime?

Even if you have business income in a particular financial year, you can choose the new tax regime but do note that it doesn’t allow major deductions that were allowed in the old tax regime. Deductions and exemptions that are now allowed against business income are

• Additional depreciation under Section 32
• Investment allowance under section 32AD
• Sector-specific business deductions under section 33AB and 33ABA
• Expenditure on scientific research under section 35
• Capital expenditure under section 35AD
• Exemption under section 10AA for SEZ units.

Also, you cannot set off the carried forward business loss or unabsorbed depreciation with your business income.

Which tax regime is better? The new tax regime or the old tax regime?

The answer to this really depends on the taxpayer that is in concern. We have gone through some of the exclusions and differences between both tax regimes. If the taxpayer has investments or expenses towards the deductions that are available in the old tax regime, they can claim such deductions and make their taxable income significantly lower and ultimately pay lower taxes as compared to the new tax regime. While on the other hand, if the taxpayer hasn’t really made investments and expenses towards the deductions and exemptions, it would be beneficial to choose the new tax regime and pay income tax at reduced tax rates.

Is Standard Deduction allowed in FY 2022-23 under the new tax regime?

The Standard deduction of Rs. 50,000 is not allowed in the new tax regime for FY 22-23. However, it was introduced in the budget of 2023 under the new tax regime as well. So, from FY 2023-24, the standard deduction will also be available under the new tax regime.Ready to make the most of your money? Start your tax planning journey now!

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.