Section 115BAC: New Tax Regime – Analysis, Comparison and Key Points

Section 115BAC of the Income Tax Act, 1961 was introduced by Finance Act, 2020 for the first time and the provisions have been significantly amended vide Finance Act, 2023 which are applicable w.e.f. Assessment Year 2024-25.

The New provisions of Section 115BAC of the Act (as applicable from AY 2024-25) provide that the New Tax Regime will be the default tax regime as announced by the Honourable Finance Minister in her Budget Speech while presenting Union Budget, 2023.

The relevant Extract of Budget Speech 2023 is as under:

“We are also making the new income tax regime as the default tax regime. However, citizens will continue to have the option to avail the benefit of the old tax regime”

Calculation of income tax has seen a paradigm shift from the old income tax slabs having Basic exemption limit of 2.5 Lakhs in which the taxpayers (generally no Tax upto total income of Rs. 5 Lakhs by way of Rebate u/s. 87A) were eligible to claim majority of the deductions / exemptions such as HRA, Interest on housing loan in respect of self occupied house property, Chapter VI-A deductions including 80C, 80D, 80G, 80TTA, etc., now commonly referred to as ‘the Old Regime’. Whereas, now, with the introduction of Section 115BAC, the taxation has been simplified and tax rates are significantly lower as per Section 115BAC(1A), i.e., although the taxpayers shall not be eligible to claim majority of the deductions / exemptions from the total income, but the rates of tax will be lower. Generally, no tax shall be payable by an assessee having total income upto Rs. 7 Lakhs (w.e.f. AY 2024-25) as per the provisions of Section 115BAC of the Act, now commonly referred to as ‘the New Regime’.

Detailed discussion relating to provisions of Section 115BAC (‘the New Regime’) and its comparison with earlier provisions (‘the Old Scheme’) is as under:

Q.1 Applicability of the New Regime – Section 115BAC:

Ans. W.e.f. AY 2024-25, the New Regime of taxation provided under section 115BAC of the Act is THE DEFAULT TAX REGIME which is applicable to following persons:

a) Individual,

b) HUF,

c) AOP (other than a cooperative society),

d) Body of Individuals (whether incorporated or not),

e) An artificial juridical person as defined u/s. 2(31)(vii).

Partnership firms (including LLP), Companies, Cooperative Societies are not covered under Section 115BAC.

Upto AY 2023-24: Only Individual and HUF could opt for New Tax Regime u/s. 115BAC.

Q.2 Fundamental amendment vide Finance Act, 2023 making new tax regime as Default Tax Regime – What does it means and what are the implications of making New Regime as Default?

Ans. Upto AY 2023-24:

a) Optional for assessee to opt for taxation u/s. 115BAC.

b) Option to be exercised by filing Form 10-IE (in case of person having income from business or profession) within due date u/s. 139(1) of the Act.

c) Option to be selected while filing return of income u/s. 139(1) of the Act (in case of person not having income from business or profession).

d) If Option not exercised – then return of income had to be filed only under the Old Scheme.

e) Applicable only to Individual or HUF.

W.e.f. AY 2024-25:

a) New Regime (Section 115BAC) is Default Tax Regime and Old Regime is optional.

b) If a taxpayer (having income from business or profession) has to opt for Old Regime, then Form 10-IEA has to filed within the due date specified u/s. 139(1) of the Act.

c) If a taxpayer (not having income from business or profession) has to opt for Old Regime, then Option has to be selected while filing return of income u/s. 139(1) of the Act.

d) To opt out of the New Regime, the above procedure (of filing Form 10-IEA for person having income from business / profession or selection in ITR for person not having income from business / profession) is irrespective of whether such taxpayer had filed ITR for AY 2023-24 under the Old Regime or the New Regime.

Q.3 Whether decision of opting out of Section 115BAC in AY 2024-25 affect AY 2025-26 or subsequent AY’s?

Ans. For taxpayers having income from business or profession:

New Regime is default tax regime from AY 2024-25. If a person opts out of New Regime and opts for Old Regime, then Form 10-IEA is required to be filed within due date specified u/s. 139(1) of the Act. If a person opts for Old Regime, then such person cannot opt out from Old Regime for the same year. However, such person can opt out from Old Regime in subsequent AY (say AY 2025-26) by again filing Form 10-IEA, but then such person shall never be eligible to Opt for Old Regime again.

For taxpayers NOT having income from business or profession:

Taxpayers not having income from business or profession are not required to file Form No. 10-IEA separately. They can select whether they are filing return of income under Section 115BAC or old regime while filing their return of income u/s. 139(1) of the Act.

Such a decision can be made independently for each Assessment year, i.e., decision for AY 2024-25 will not affect decision for AY 2025-26 and subsequent AY’s.

Thus, a person not having income from business or profession is free to opt out from Section 115BAC and opt in for Section 115BAC independently for each AY while filing return of income u/s. 139(1) of the Act irrespective of the selection in earlier AY.

Q.4 How will the decision of whether return filed in New Regime or Old Regime as opted by the assessee in ITR of AY 2023-24 affect decision / procedure for AY 2024-25?

Ans. Irrespective of whether the taxpayer had filed ITR for AY 2023-24 under the Old Regime or the New Regime, but from AY 2024-25, the New Regime will be default tax regime. To opt out of the New Regime, a person having income from business / profession is required to file Form 10-IEA within the due date specified u/s. 139(1) of the Act and for a person not having income from business / profession, selection has to be made by the assessee in ITR while filing ITR u/s. 139(1) of the Act. [Section 115BAC(6)]

If the assessee opted for Section 115BAC in AY 2023-24: If the assessee wants to continue to opt for New Regime for the AY 2024-25, then such an assessee shall not be required to furnish any form or any option because now from the AY 2024-25, Tax rates u/s. 115BAC are the default tax rates for which no option is required to be exercised.

If the assessee filed ITR for AY 2023-24 as per Old provisions (Old Regime) and not as per Section 115BAC: For filing return of income as per Old Regime upto AY 2023-24, no option was required to be filed upto AY 2023-24. Further, from AY 2024-25, New Tax Regime is the Default tax regime. Thus, if an assessee wants to file return of income under the new tax regime u/s. 115BAC of the Act, then Form 10-IEA is NOT required to be filed (for persons having income from business / profession).

However, Form 10-IEA is required to be filed for AY 2024-25 only when the assessee wants to file his return of income as per the Old Regime, i.e. the assessee wants to opt out the default New Tax Regime.

Further, Form 10-IEA shall not be required to be filed for persons not having any income from business or profession during AY 2024-25, if they want to opt out from the default New Tax Regime and file their return of income as per the Old Regime. Selection of Option in the ITR Form shall be sufficient while filing return of income u/s. 139(1) of the Act, for persons not having any income from business / profession.

Q.5 What if the assessee has filed Form 10-IEA for the AY 2024-25 within due date specified u/s. 139(1) for opting out from Section 115BAC, but could not file return of income within the due date specified u/s. 139(1)?

Ans. As the New Regime (i.e. Section 115BAC) is the default tax regime. Therefore, to opt out from the New Regime, a person having income from business / profession is required to file Form No. 10-IEA within the due date specified u/s. 139(1) of the Act in accordance with the provisions of Section 115BAC(6) of the Act read with Rule 21AGA(1)(a) of the Income tax Rules, 1962. However, for persons having income from business / profession, there is no requirement that the return of income should also be filed within due date specified u/s. 139(1).

Thus, even if an assessee has filed Form No. 10-IEA for opting out from default New Tax Regime (i.e. to opt out from Section 115BAC), but fails to furnish his ITR u/s. 139(1) of the Act and furnishes belated ITR or updated ITR under section 139(4) or Section 139(8A) of the Act respectively, the assessee shall be eligible to pay tax as per the Old Regime on the basis of Form 10-IEA filed within due date specified u/s. 139(1) of the Act.

However, in respect of an assessee who is not having any income from business / profession, then Form 10-IEA is not required to be filed by such person for opting out from default New Tax Regime. However, return of income is mandatorily required to be filed within the due date specified u/s. 139(1) of the Act for opting out from the default New Tax Regime. If such a person (not having income from business or profession) fails to furnish return of income u/s. 139(1) of the Act, then such a person shall NOT BE ELIGIBLE to opt out from the default New Tax Regime and the tax shall be applicable as per the default New Tax Regime u/s. 115BAC(1A) of the Act.

Q.6 What if the assessee fails to furnish Form No. 10-IEA within the due date specified u/s. 139(1) of the Act for the AY 2024-25?

Ans. If an assessee (having income from business or profession) fails to furnish Form 10-IEA on or before the due date specified u/s. 139(1) of the Act, as applicable to the assessee, then in such cases, the assessee shall NOT BE ELIGIBLE to opt out from the default New Tax Regime and the tax shall be applicable as per the default New Tax Regime u/s. 115BAC(1A) of the Act.

Further, if an assessee is having income from business or profession, who decides to Opt out from the default New Tax Regime, inadvertently fails to furnish Form 10-IEA, then such an assessee shall be prevented from uploading ITR as per Old Regime without furnishing Form 10-IEA on the Income tax portal because of the following 2 reasons:

a. Details of Form 10-IEA such as Date of filing and its Acknowledgment number is required to be mentioned in the ITR Form.

b. As per ITR Validation Rules, if an assessee has selected that Option u/s. 115BAC(6) (i.e. Opting out from Default New Regime) has been selected as Yes in the ITR Form and has mentioned details of Form 10-IEA, the Income tax Portal shall, at the time of uploading of ITR, validate the details of Form No. 10-IEA mentioned by the assessee with the Online Income tax Form 10-IEA submitted by the assessee as per ITR Validation Rules issued by Directorate of Income Tax (Systems).

Thus, practically, such a mistake will not happen that the assessee has paid taxes and furnishes ITR as per Old Regime and inadvertently fails to furnish Form 10-IEA, which will prevent unwarranted Intimations u/s. 143(1) of the Act being issued by CPC, Bengaluru.

Q.7 Whether an assessee will be able to change the Option from New Regime to Old Regime or vice-versa, by filing a revised return of income u/s. 139(5) of the Act?

Ans. Section 115BAC(6) of the Act is as under:

“(6) Nothing contained in sub-section (1A) shall apply to a person where an option is exercised by such person, in the manner as may be prescribed, for any assessment year, and such option is exercised,

(i) on or before the due date specified under sub-section (1) of section 139 for furnishing the return of income for such assessment year, in case of a person having income from business or profession, and such option once exercised shall apply to subsequent assessment years; or

(ii) along with the return of income to be furnished under sub-section (1) of section 139 for such assessment year, in case of a person not having income referred to in clause (i):

Provided that the option under clause (i), once exercised for any previous year can be withdrawn only once for a previous year other than the year in which it was exercised and thereafter, the person shall never be eligible to exercise the option under this sub-section, except where such person ceases to have any income from business or profession in which case, option under clause (ii) shall be available.”

As per Proviso to Section 115BAC(6) of the Act, an assessee, who has exercised Option by way of filing Form No. 10-IEA (i.e. a person having income from business of profession), such an assessee shall not be eligible to change the same for that assessment year. Thus, even if ITR has not been filed, but the assessee has filed Form 10-IEA for opting out from Default New Tax Regime, then also, the assessee shall have to file return of income as per the Old Regime only because Form 10-IEA has already been furnished by the assessee and the assessee will not be able to file return of income as per New Tax Regime. This option cannot be changed by way of filing revised return of income.

Q.8 Whether specified tax rates applicable to specific incomes other than income liable u/s. 115BAC, applicable to persons opting for Section 115BAC ?

Ans. Following special tax rates specified in, “Chapter XII – Determination of Tax in Certain Special Cases” will be liable to be taxed as per rates specified in respective sections only such as LTCG shall be liable to be taxed u/s. 112 or 112A, STCG shall be taxed u/s. 111A and remaining specified incomes under Chapter XII such as Section 115BBE, 115BBC, 115BBH, 115BBI, 115BBJ, etc.) shall be taxed accordingly at the rates specified in respective Sections.

Q.9 What all exemptions / deductions shall not be available under the New Tax Regime?

Ans. Under the default New Tax Regime, as per Section 115BAC(2) of the Act, following exemptions / deductions / allowances shall not be available while computation of total income:

a. Leave Travel Concession or Leave Travel Allowance – LTC/LTA [Section 10(5)]

b. Housing Rent Allowance (HRA) [Section 10(13A)]

c. Section 10(14) [other than those specified in Rule 2BB(1)(a) to (c) and Sr. No. 11 to Table in Rule 2BB(2)] (Rule 2BB(1)(a) to (c): Travel / tour allowance / allowance to meet travelling expense on account of absence from normal place of duty / allowance to meet expenditure on conveyance for performing office duty, to the extent that amount has been actually incurred by the employee shall continue to remain Exempt under New Tax Regime u/s. 115BAC and as per Point No. 11 in Table in Rule 2BB(2): Conveyance allowance of Rs. 3,200 per month granted to Employee who is blind / deaf / dumb / handicapped shall continue to remain Exempt under New Tax Regime u/s. 115BAC of the Act.)

Point No. 11 of Table in Rule 2BB(2)

d. Daily allowance or constituency allowance received by Member of Parliament or MLA [Section 10(17)]

e. Allowance of Rs. 1,500/- on minor’s income [Section 10(32)

f. Section 10AA – Exemption in respect of newly established Units in Special Economic Zones.

g. Entertainment Allowance received by Government Employee [Section 16(ii)]

h. Professional tax deducted by employee [Section 16(iii)]

i. Interest on borrowed capital in respect of Self occupied Property specified under Section 23(2) [Section 24(b)]

j. Additional Depreciation [Section 32(1)(iia)]

k. Specified deductions / allowances [Section 32AD, Section 33AB, Section 33ABA, 35(1)(ii)/(iia)/(iii) or 35(2AA), Section 35AD, Section 35CCC]

l. Chapter VI-A deductions shall not be allowable under New Tax Regime [Except 80CCD(2) i.e. Employers Contribution to NPS upto 14% of Salary for Central and State Government Employees and 10% of Salary for Other Employees, Section 80CCH(2) and Section 80JJAA for additional employee cost, which will continue to be deductible under New Tax Regime]

As per Section 115BAC(2)(ii)(a) – Brought Forward Loss or Depreciation – if pertaining to deductions referred to in Section 115BAC(2)(i) (i.e. Additional Depreciation, investment allowances, etc.) due to deductions claimed in earlier years, shall not be allowed to be set off from the total income. computed in accordance with Section 115BAC.

Further, as per Section 115BAC(2)(ii)(b) – Loss from house property shall not be allowed to be set-off against any other head of income.

Section 115BAC(2)(iv) – Exemption or deduction for allowances or perquisite, by whatever name called, provided under any other law for the time being in force shall not be available.

Q.10 Whether a Salaried person will be eligible to claim Standard deduction of Rs. 50,000/- under the default New Tax Regime?

Ans. Yes. A Salaried person shall be eligible to claim Standard deduction of Rs. 50,000/- as per Section 16(ia) of the Act.

Q.11 Whether a person receiving Family pension shall be eligible to claim Standard deduction u/s. 57(iia) of the Act?

Ans. Yes. Family Pensioners shall be eligible to claim deduction of 1/3^rd of the amount of family Pension subject to maximum deduction of Rs. 15,000/- as per Section 57(iia) of the Act.

Q.12 Rebate under section 87A of the Act alongwith Marginal Relief for persons whose income marginally exceeds Rs. 7 Lakhs.

Ans. The Rates of taxation u/s. 115BAC(1A) of the Act [as applicable for AY 2024-25] are as under:

Rebate of Income tax u/s. 87A of the Act:

As per Section 87A of the Act, for an assessee having total income upto Rs. 7 Lakhs, Rebate u/s. 87A of the Act shall be allowed upto Rs. 25,000/- or the amount of tax payable, whichever is lower.

Further, in case of assessee having income of more than Rs. 7 Lakhs, Marginal Rebate shall be available, i.e. tax payable shall not exceed income above Rs. 7 Lakhs due to marginal increase in income above Rs. 7 Lakhs.

Examples:

Rebate shall be computed as per Clause (b) to Proviso to Section 87A. Where, total income of the assessee exceeds Rs. 7 Lakhs, Rebate of income tax shall be allowed of tax payable, which exceeds the income above Rs. 7 Lakhs [Rebate = Tax Payable – (Total Income – Rs. 7 Lakhs)].

Thus, if the tax payable on income above Rs. 7 Lakhs is even more than the income which exceeds Rs. 7 Lakhs, a person shall not be liable to pay tax more than income above Rs. 7 Lakhs.

Note 1: In case of Total Income of Rs. 7,10,000/-. Tax Payable is Rs. 26,000/-, whereas the assessee has earned only Rs. 10,000/- above Rs. 7,00,000/-. Thus, due to additional amount of income of Rs. 10,000/-, the tax payable comes out to Rs. 26,000/-. Thus, tax burden upon the assessee due to additional income of Rs. 10,000/-, is Rs. 26,000/-, which is even more than the additional income. Thus, to avoid such genuine hardship, Marginal Rebate u/s. 87A of the Act of Rs. 16,000/- (26,000 less 10,000 i.e. Tax in excess of Income above Rs. 7 Lakhs) shall be reduced from income tax payable of Rs. 26,000/- and the assessee will have to pay income tax of only Rs. 10,000/- as against Rs. 26,000/-. (to be increased by Education Cess)

Note 2: In case of Total Income of Rs. 7,30,000/-, Tax Payable is Rs. 28,000/-. Since Tax payable (i.e. Rs. 28,000/-) is less than Income exceeding Rs. 7 Lakhs (Income exceeding Rs. 7 Lakhs is Rs. 30,000/-), no Rebate u/s. 87A of the Act shall be allowed to be deducted from the amount of income tax payable by the assessee. Thus, the assessee shall be liable to pay tax of Rs. 28,000/-. (to be increased by Education Cess)

Q.13 Whether Rebate under section 87A of the Act is available to a HUF filing return as per Default New Tax Regime u/s. 115BAC(1A) of the Act?

Ans.  No. Rebate u/s. 87A of the Act is available only to an Individual Assessee, who is a resident of India.

Q.14 What is the maximum rate of Surcharge under New Tax Regime?

Ans. Under the Old Tax Regime, Maximum Rate of Surcharge is 37%, whereas, in respect of an assessee, filing return under New Tax Regime, i.e. under Section 115BAC(1A) of the Act, Maximum Rate of Surcharge is 25% as against 37% in Old Tax Regime. Thus, Effective Rate of Tax shall be reduced from 42.744% to 39%.

Q.15 Whether an Employee is required to intimate to his Employer regarding which Option the employee is going to opt (New Regime or Old Regime) for the purpose of TDS u/s. 192 of the Act and can the Employee change the same while filing his Individual ITR?

Ans. Employer should obtain information from the Employee regarding their intended tax regime for the purpose of deduction of tax u/s. 192 of the Act. Upon receipt of intimation from the Employee regarding whether the Employee is going for Default New Tax Regime or is Opting out from Default New Tax Regime and is Opting for Old Tax Regime, TDS u/s. 192 of the Act should be deducted accordingly after computing the total income as per Intimation obtained from the Employee.

If the employee has not intimated about any of the Option, then, it shall be deemed that the employee shall continue in the Default New Tax Regime and the employer is required to deduct tax as per Section 115BAC(1A).

Further, Intimation to Employer regarding New Regime or Old Regime, shall not be binding while filing Individual ITR by the Employee and such Option can be changed at the time of filing Individual ITR. At the time of filing of return of income u/s. 139(1) of the Act, if the employee compares both tax regime i.e. default tax regime and old tax regime and he finds that the Tax Regime, other than that intimated to the Employer for tax deduction u/s. 192 of the Act, more beneficial, then he may chose the option which is comparatively beneficial to him while filing of return of income u/s. 139(1) of the Act.

Conclusion:

The choice between the existing and new tax regimes depends on various factors such as income level, eligibility for deductions/exemptions, financial goals, etc. While this regime provides simplicity and generally reduced tax liability in comparison to Old Tax Regime, it necessitates a careful evaluation of the impact on overall tax liability and financial planning.

Taxpayers must weigh the advantages and disadvantages of Opting out from Default New Tax Regime and need to evaluate which regime is more beneficial for them based on their specific circumstances.

In the above Article, I have tried to Explain the provisions of Section 115BAC of the Act, including its Legal as well as Procedural aspect alongwith comparison of Old Tax Regime vs. New Tax Regime, which will be helpful for decision making while filing the return of income. I hope you find this Article useful.