Analysis of Section 115BAC of Income Tax

Introduction

The Government of India has introduced the Taxation (Amendment) Ordinance Act,  2019, on the 20th of September 2019. Several amendments are made in the Income Tax Act, 1961 through this ordinance. During the Budget 2020 speech, Finance Minister, Nirmala Sitharaman announced the insertion of the new Section  115BAC in the Income Tax Act, 1961. Section 115BAC, effective from 1st April, 2021, deals with the optional income tax regime for Individuals and Hindu Undivided Families (HUFs). This section is inserted in order to provide the benefit of significant reduction in income tax slab rates. However, The new and optional income tax regime comes with the consequential surrender of specified deductions/ incentives.

Let us discuss this further in detail.

Section 115BAC- Tax on income of the Individuals and Hindu Undivided Family

Any individual or Hindu Undivided Family (HUFs) other than “Income from Business or Profession”  has the option to pay tax as per the new income tax slab rates, subject to following conditions:

The total income of the individual or Hindu undivided family shall be computed,—

(i)  without any exemption or deduction under the provisions of clause (5) or clause (13A) or prescribed under clause (14) (other than those as may be prescribed for this purpose) or clause (17) or clause (32), of section 10 or section 10AA or section 16 or clause (b) of section 24 (in respect of the property referred to in sub-section (2) of section 23) or clause (iia) of sub-section (1) of section 32 or section 32AD or section 33AB or section 33ABA or sub-clause (ii) or sub-clause (iia) or sub-clause (iii) of sub-section (1) or sub-section (2AA) of section 35 or section 35AD or section 35CCC or clause (iia) of section 57 or under any of the provisions of Chapter VI-A other than the provisions of sub-section (2) of section 80CCD or section 80JJAA;

(ii)  without set off of any loss,—

(a)  carried forward or depreciation from any earlier assessment year, if such loss or depreciation is attributable to any of the deductions referred to in clause (i);

(b)  under the head “Income from house property” with any other head of income;

(iii)  by claiming the depreciation, if any, under any provision of section 32, except clause (iia) of sub-section (1) of the said section, determined in such manner as may be prescribed; and

(iv)  without any exemption or deduction for allowances or perquisite, by whatever name called, provided under any other law for the time being in force.

However, loss and depreciation will be deemed that full effect has already been given and no further deduction shall be allowed for any subsequent years.

Circular F. No. 370142/13/2020-TPL  dated 13th April, 2020

The Ministry of Finance issued a clarification regarding TDS deduction by employers with respect to Section 115BAC. It states that Salaried individuals have to inform their employers, if they are planning to opt for the reduced income tax slab rate under section 115BAC, so that the employers can deduct TDS as per the new slab rates. If an employee fails to inform  his/her decision to opt for the new tax regime, then the employer will continue to deduct TDS as per the existing slab rates.

Existing tax regime vs New tax regime

The old (existing) tax regime allows an individual or HUF to enjoy various deductions/ exemptions whereas the new regime withholds the same. The new regime would be beneficial to those who do not significantly invest in the tax-saving schemes, such as Employee Provident Fund (EPF), Equity Liked Saving Scheme (ELSS), New Pension Scheme (NPS), National Saving Certificate (NSC) etc. Moreover, the standard deduction of Rs. 50,000 and House Rent Allowance (HRA) for the Salaried individuals also do not apply to the new scheme

Let us understand the income tax payout under the two schemes by the following illustration:

Mr. X (Salaried employee) has availed the deduction under section 80C up to Rs. 1.5 lacs, deduction under section 80D Rs. 25,000 and standard deduction Rs. 50,000. i.e; Rs. 2.25 lacs deduction. The following table gives the detail of Taxable Income and Tax payable by Mr. X under the two regime.

* After providing Rebate under section 87A 

Thus, the above table clearly states that the new regime is beneficial for the high taxed income group. However, the existing scheme is best suited for the low-middle income group of individuals or HUFs, if sufficient investment are made under tax-saving scheme. It is favourable to opt for the new regime only after taking into consideration tax payout under both regime.

Conclusion

Any individual or HUFs  planning to opt the benefit of the new section must read the sections, rules and notifications carefully to avoid unwanted difficulties and litigations before going forward.

Disclaimer-  The contents of this document are solely for informational purpose. It does not constitute professional advice or formal recommendation. While due care has been taken in preparing this document. The author does not accept any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information nor any other action taken in reliance thereon.