INTRODUCTION
The Indian income tax framework has historically been characterized by a maze of exemptions, deductions, allowances, and rebates that made compliance complex for the ordinary taxpayer. While these provisions were designed to incentivize savings, housing, and insurance, they also resulted in complicated return filing, extensive documentation, and frequent disputes. To address these challenges, the Government of India introduced Section 115BAC[1] of the Income Tax Act, 1961 through the Finance Act[2], 2020, effective from the Financial Year (FY) 2020–21 (Assessment Year 2021–22). Popularly known as the “optional tax regime”, Section 115BAC offers taxpayers the choice of availing reduced slab rates in exchange for foregoing a majority of exemptions, deductions, and set-offs otherwise available under the old regime.
The policy rationale underlying this reform was two-fold: simplification of the tax system and enhancement of disposable income, thereby fostering higher consumption and economic growth. While initially introduced as an alternative regime, the Finance Act[3], 2023 marked a significant shift by making the new tax regime the default regime from Assessment Year (AY) 2024–25 onwards, though taxpayers can still opt for the old system. Notably, the regime now also covers income from business and profession, thereby broadening its scope and impact.
The adoption of Section 115BAC represents a paradigm shift in Indian taxation philosophy moving away from an incentive-driven model towards a lower rate, no-exemption framework. However, this change comes at the cost of eliminating several popular deductions and allowances such as those under Section 80C[4] (investments), Section 24(b)[5] (housing loan interest), and Section 16 (salary-related deductions). This has raised critical questions for taxpayers: whether the benefit of reduced tax rates truly outweighs the loss of exemptions and deductions, and for whom the new regime proves most beneficial.
This article critically examines the optional tax regime under Section 115BAC, with particular focus on the exemptions and deductions that are not available under it. It further analyzes the implications for different classes of taxpayers in light of the shift to the new default regime, thereby providing a comprehensive perspective on one of the most significant reforms in Indian direct taxation in recent decades.
Page Contents
- Scope of Section 115BAC of the Income Tax Act,1961
- Core Structure: Focus on Exemptions and Deduction not allowed
- Tax Rates under Section 115 BAC of the Income Tax Act, 1961
- Conditions laid down in the newly inserted Section 115 BAC in Income Tax Act, 1961
- Exemptions & Deductions NOT Allowed under Section 115BAC
- Conclusion
Scope of Section 115BAC of the Income Tax Act,1961
Section 115BAC is available to:
- Individuals (residents and non-residents).
- Hindu Undivided Families (HUFs).
- Societies (AOPs other than cooperative housing societies).
- Bodies of Individuals (BOIs).
- Artificial Juridical Persons (AJPs).
In the beginning, the regime was applied only to those with business income, but subsequently, amendments extended its application to all incomes, which included business and professional income -making it more encompassing. The amendments had made this regime default for all eligible taxpayers, including those with business/ professional income. Taxpayers can still opt for the old regime before the tax return due date annually using Form 10-IEA, especially relevant for those with business income.
The two essential elements that can be deduced from Sec. 115 BAC are:-
1. Concessional Tax Rates — The concessional rates thus provide flexibility to individuals and HUFs, particularly those who do not heavily rely on tax-saving instruments or do not wish to plan finances solely for the purpose of tax reduction. It reflects a shift from “tax-saving through expenditure/investment” to “tax-saving through direct lower rates.”
2. Conditions for availing them — In essence, the concessional regime operates on the principle of “either-or” either the taxpayer continues with the old regime, availing deductions and exemptions, or shifts to the new regime and gives them up in exchange for lower rates. Further, with effect from AY 2024-25, the new regime has been made the default option, though taxpayers can still opt for the old regime by filing the necessary declaration within prescribed timelines.
Core Structure: Focus on Exemptions and Deduction not allowed
Section 115BAC operates on a clear trade-off: taxpayers may enjoy lower tax rates, but only if they forego the bulk of deductions and exemptions that significantly reduce taxable income under the old regime. In the old tax regime, people could claim a variety of tax breaks for example, deductions for investments under Section 80C (like LIC premiums, PPF, ELSS, etc.), for medical insurance premiums under Section 80D[6], or exemptions for things like House Rent Allowance (HRA) and Leave Travel Allowance (LTA). These benefits allowed individuals to lower their taxable income and, therefore, pay less tax.
Under Section 115BAC, however, the government’s idea is to simplify the tax process. Instead of calculating tax after adjusting dozens of exemptions and deductions, taxpayers can directly apply the reduced tax rates to their gross income. The trade-off is that almost all popular tax-saving deductions and exemptions including housing loan interest for self-occupied property, standard deduction from salary, and most allowances are not available.
Tax Rates under Section 115 BAC of the Income Tax Act, 1961
Sec. 115BAC[7] prescribes with the non obstante clause, overriding other provisions of the act and prescribes the total income of an individual/ HUF shall be computed at the concessional rates if the taxpayer opts in and introduced provided concessional tax rates.
| Sl. No. | Total Income | Rate of Tax |
| 1. | Upto Rs. 2,50,000 | Nil |
| 2. | From Rs. 2,50,001 to Rs. 5,00,000 | 5% |
| 3. | From Rs. 5,00,001 to Rs. 7,50,000 | 10% |
| 4. | From Rs. 7,50,001 to Rs. 10,00,000 | 15% |
| 5. | From Rs. 10,00,001 to Rs. 12,50,000 | 20% |
| 6. | From Rs. 12,50,001 to Rs. 15,00,000 | 25% |
| 7. | Above Rs. 15,00,000 | 30% |
Where the person fails to meet these conditions in any previous year, the option will become invalid for the assessment year related to that previous year. Other provisions of the Act will then apply, as if the option had not been exercised for that assessment year. This amendment is effective from the assessment year 2020-21.[8]
However for the AY 202-26(FY 2024-25), Budget 2023 revised the slabs to enhance appeal, uniform across different tax slabs:-
| Income Range | Tax Rates | Tax Calculation Example |
| Upto 3,00,000 | Nil | No tax |
| 3,00,000 – 7,00,000 | 5% | 5% on Income above 3,00,000 |
| 7,00,001 – 10,00,000 | 10% | Rs. 20,000 + 10% on Income above 7,00,000 |
| 10,00,000 – 12,00,000 | 15% | Rs. 50,000 + 15% on Income above 10,00,000 |
| 12,00,001 – 15,00,000 | 20% | Rs. 80,000 + 20% on Income above 12,00,000 |
| Above 15,00,000 | 30% | Rs. 1,40,000 + 30% on Income above 15,00,000 |
Thus, the section offers lower rates but makes them conditional. If the conditions are violated, the option becomes invalid for that year and the normal provisions apply.
The additional features of tax rates under section 115 BAC are rebate under section 87A are for resident individuals’ upto Rs. 7 lakh, rebate up to Rs.25000 ensures zero tax liability. Additionally, surcharge of 10% ( Income > Rs. 50 Lakh), 15 % (Income> Rs. 1 crore), 25% (Income> Rs.2 crore), subject to marginal relief. Finally the health and education cess at 4% continues.
Conditions laid down in the newly inserted Section 115 BAC in Income Tax Act, 1961
Broadly speaking, no exemption or deduction under any other section or under Chapter VI-A, and no set-off of any loss, will be allowed.
In this connection, some of the above conditions may be stated as follows:
(i) Once the option is exercised, it is valid for that assessment year and subsequent assessment years. Therefore, the option cannot be withdrawn.
(ii) Individuals with business income are not eligible to choose the lower tax regime.
(iii) Once a person earns business income after opting for the lower tax regime, that person must opt out of this regime. Furthermore, that person cannot choose the lower tax regime while earning business income.
Exemptions & Deductions NOT Allowed under Section 115BAC
The statutory formulation and official guidance (Income Tax Department FAQs[9]; Finance Act memorandum[10]) mean that the following categories of exemptions/deductions are not available to taxpayers whose incomes are taxed under Section 115BAC (unless specifically carved out). The list below aggregates the legal text and official FAQs into a single, usable checklist.
Principal rule: Chapter-VIA deductions (e.g. Sections 80C–80U) and many section-10 exemptions are not allowed subject to the limited exceptions listed later.
A. Commonly asserted exemptions under section 10 that are not allowed
Under the new regime introduced by Section 115BAC, several of the most widely availed exemptions under Section 10[11] of the Income-tax Act, 1961 are expressly disallowed. Notably, the House Rent Allowance (HRA) exemption under Section 10(13A), which has traditionally benefited salaried employees living in rented accommodation, is no longer permissible. Similarly, the Leave Travel Allowance (LTA) or Leave Travel Concession (LTC) available under Section 10(5), which provided relief for expenses incurred on travel within India, is also excluded. Further, the broad category of special allowances under Section 10(14), such as conveyance allowance, city compensatory allowance, and uniform allowance, has largely been withdrawn under the new regime, except for certain narrowly defined situations. In addition, other perquisites and allowances previously exempt under various clauses of Section 10, if covered by the disallowance in Section 115BAC(2)(i), are rendered unavailable. The Income Tax Department’s official FAQs have explicitly emphasized that both HRA and LTA, long regarded as essential components of salary structuring and tax planning, cannot be claimed when opting for the concessional rates under Section 115BAC. This makes the new regime less attractive for salaried taxpayers who substantially rely on such exemptions, underscoring the trade-off between lower slab rates and the forfeiture of popular tax benefits.
Note: The Income Tax Department FAQs repeatedly state HRA and LTA exemptions are not available in the new regime.
One of the most significant sacrifices taxpayers make under the new regime is the loss of deductions relating to income from house property. Under the old regime, Section 24(b)[12] of the Income-tax Act, 1961, permitted taxpayers to claim a deduction of up to ₹2,00,000 towards interest paid on borrowed capital for a self-occupied house property. This provision has historically been an important tax incentive, encouraging home ownership and making housing loans more affordable. However, Section 115BAC disallows this benefit entirely when the new regime is chosen. As a result, the standard deduction for interest on a self-occupied property, as well as similar deductions for a vacant property, cannot be claimed. The impact is particularly adverse for individuals servicing housing loans, since the loss of this ₹2,00,000 deduction can significantly increase their taxable income. In effect, the new regime prioritizes simplicity and concessional slab rates over such targeted reliefs, thereby altering the financial calculus for taxpayers with housing loans—who may continue to prefer the old regime if the benefit from Section 24(b) outweighs the slab rate savings under Section 115BAC.
Another important area of disallowance under Section 115BAC concerns the deductions traditionally available under Section 16 of the Income-tax Act, 1961, which deals with income under the head “Salaries.” Under the old regime, salaried taxpayers could claim certain specific deductions, such as the entertainment allowance (in the case of government employees) and professional tax (tax on employment, levied by some states). These deductions provided relief by reducing taxable salary to a limited extent. However, the new regime expressly disallows these Section 16 deductions, thereby increasing the taxable base for salaried individuals. The rationale advanced by the government is that concessional slab rates under Section 115BAC are intended to offset the loss of such deductions, streamlining salary computation by eliminating multiple adjustments. It is important to note, however, that while these traditional Section 16 deductions are withdrawn, a limited standard deduction of ₹50,000 has been retained even in the new regime after amendments made by the Finance Act, 2023. Thus, while taxpayers lose the benefit of professional tax and entertainment allowance deductions, they still enjoy a uniform standard deduction, ensuring some measure of relief across the salaried class.
Conclusion
The optional tax regime under Section 115BAC represents a fundamental shift in India’s income-tax landscape, moving from an exemption-driven structure to a rate-driven framework. By disallowing a wide range of exemptions and deductions, the legislature has sought to simplify compliance and broaden the tax base, while simultaneously offering concessional slab rates to encourage voluntary adoption. However, this simplification comes at the cost of long-standing incentives for savings, housing, and social security contributions that were embedded in the old regime.
For taxpayers, the regime is ultimately a question of trade-off and computation: those with significant investments in tax-saving instruments or housing loans may still find the old regime advantageous, while those with limited deductions may benefit from the new concessional rates. The Finance Act, 2023’s shift to making the new regime the default underscores the government’s policy preference, but it preserves the flexibility of opting out in appropriate cases.
Going forward, the success of Section 115BAC will depend not only on its revenue impact but also on whether it truly achieves the intended policy goals of simplification and equity. For practitioners and scholars, the provision is a striking example of how tax law can balance efficiency with taxpayer choice, while also reflecting broader economic priorities.
Notes:
[1] Income Tax Act, No. 43 of 1961, § 115BAC (India).
[2] The Finance Act, No. 12 of 2020, Acts of Parliament, 2020 (India).
[3] The Finance Act, No. 8 of 2023, Acts of Parliament, 2023 (India).
[4] Income Tax Act, No. 43 of 1961, § 80C (India).
[5] Income Tax Act, No. 43 of 1961, § 24(b) (India).
[6] Income Tax Act, No. 43 of 1961, § 80D (India).
[7] Ibid.
[8] The Finance Bill, 2020, (2020) 421 ITR (Jrn) 13.
[9] FAQs on New Tax vs Old Tax Regime, Income Tax Department, Govt. of India, https://www.incometax.gov.in/iec/foportal/help/new-tax-vs-old-tax-regime-faqs (last visited Sept. 16, 2025).
[10] Memorandum Explaining the Provisions of the Finance Bill, 2020, Ministry of Finance, Govt. of India, https://www.indiabudget.gov.in/doc/memo.pdf (last visited Sept. 16, 2025).
[11] Income Tax Act, No. 43 of 1961, § 10 (India).
[12]Income Tax Act, No. 43 of 1961, § 24(b) (India).
Author Bio
This article gives a very clear explanation of Section 115BAC and how the optional tax regime reshapes tax planning for individuals and businesses. I appreciate how it balances the pros of simplified compliance with the cons of losing popular deductions like HRA, LTA, and home loan interest. The comparison of benefits helps taxpayers evaluate which regime suits them best. It’s an excellent resource for understanding the real impact of this reform.