Income Tax is a subject, discussion on which most people tend to avoid, because of its complexity, and ever-evolving nature. To add to it, various provisions keep changing every year on presentation of Budget by Finance Minister on 01st of February. Further, it is that time of the year when declarations have to be given by the Employees to its employer with respect to Investment declaration. With introduction of section 115BAC, one more requirement that each of the employee is saddled with, i.e. with respect to communication to the employer whether he intends to opt for being taxed under New Regime or continue to be taxed under old regime. In this article I have tried to explain the features of New regime and to assist you in selecting the regime under which you should be opting to be taxed.

Understanding of Section 115 BAC

First thing that must be kept in mind is that it is not mandatory to opt for new scheme, as government has continued with old regime as well and every Individual and HUF not having Income from Business or Profession has to select the option between Old regime or new regime at the time of filing of return of income every year.

We are all aware that under Old regime, we used to make certain specified Investments (Ex. LIC, PPF, Mediclaim, National Pension Scheme, Equity Linked Savings Scheme, Donations etc.) and claim the same as deduction from the Income and pay Tax on Net Income. However, under the new scheme one has to pay tax directly on the Income and no deductions are allowed (barring 2 deductions), but the rate of tax is lower as compared to Old Regime. The summary of Rate of Tax under New Regime and Old Regime are as under:

Income slabs (Rs) Tax Rate (Old Regime) Tax Rate (New Regime – devoid of exemptions & deductions)
Up to 2.5 lakh Nil Nil
2.5-5 lakh 5% 5%
5-7.5 lakh 20% 10%
7.5-10 lakh 20% 15%
10-12.5 lakh 30% 20%
12.5-15 lakh 30% 25%
Above 15 lakhs 30% 30%

Surcharge and Cess shall apply in addition to the above slab rates.

So, if one intends to opt for being taxed at lower rates under New Regime, he is relieved of making any Investments and giving proofs in support of the same to his employer.

Now, let’s look at major Deductions that has to be foregone by Individual and HUF, if he opts for New Scheme:

a. Standard deduction of Rs. 50,000 from Salary Income.

b. Deduction on account of House Rent Allowance.

c. Chapter VI-A deduction Ex. Contribution to LIC, Mediclaim, Provident Fund, National Pension Scheme, Tax Savings Mutual fund (ELSS).

d. Deduction on account of Leave Travel Allowance, HRA, Section 10(14).

e. Loss incurred in House Property because of Interest on Home Loan availed for Self-Occupied Property.

Section-Wise deduction not allowed can be summarised as under (For Individual and HUF not having Income from Business or Profession)

Deductions under Salary Deduction under Chapter VI-A Others
Standard Deduction amounting to Rs. 50,000. Major Deductions under Chapter VIA (u/s 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80G, etc.) Home Loan Interest u/s 24(b) for Self-Occupied Property
House Rent Allowance u/s 10(13A) Deduction from Family Pension u/s 57(iia)
Allowances allowed to the extent spent u/s 10(14). Allowance under 10(17) Deduction on account of clubbing Income of Minor Child (Sec 10(32)
Deduction under section 16

Under Chapter VI-A, only Contribution made by Employer to Pension scheme notified by government is allowed as deduction under section 80CCD (2), that too to the extent of 10% of the Salary. No other deduction is allowed apart from this under Chapter – VI-A. Further, Loss incurred due to Interest paid on Home loan availed for property which has been let-out is allowed as deduction.

CERTAIN KEY FEATURESOF SECTION 115 BAC

> The option is to be exercised at the time of filing of return. If one wants to opt for New scheme, he should file his return before due-date under section 139(1). Thus, in case return if return is filed after Due date, you cannot opt for being taxed under New regime and have to compulsorily be taxed under Old Regime. So, now apart from Late filing fees under Section 234 F, Individual and HUF also loses the option of being taxed under New regime.

> Employee at the time of Making declaration to his Employer may choose to be taxed under a particular scheme, but the option selected is not final and he can choose option other then one communicated to employer at the time of filing his Income Tax return. So, for instance if employee had communicated to employer, that he shall opt for New scheme and then later on he feels that Old scheme was better, then at the time of filing return he can choose Old scheme, even though his TDS was deducted by Employer in accordance with New Scheme. (This has been clarified by CBDT Circular dated 13th April, 2020).

> This option of being taxed under Old regime or New Regime is there every year, if Individual and HUF does not have income from Business or Profession.

CONCLUSION: Whether an employee should opt for New scheme or old scheme will depend on the Income that he earns, specified Savings that he makes and thus, for someone old scheme may be better, whereas for someone else new scheme would be appropriate. So, for Instance, if someone is regular in his savings, or he has Home Loan for property in which he lives or he is living in rented premises then he may be better-off in Old regime instead of new. Whereas if an employee has no burden of Home loan, or he lives in his own house, does not want to make Investments in specified places then he should go for New regime. Thus, one must calculate the total tax outgo as per New and old scheme and only then decide what to opt for.

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