Section 115BAC – A New Tax Regime for Individuals and HUFs

Similar to benefit of the concessional new tax regime for companies introduced in the Finance Act 2019, the Government came up with the concessional tax provisions for Individuals and HUFs by inserting a new Section 115BAC under the Income Tax Act, 1961 (‘Act’) with effect from FY 2020-21. The broad provisions are enumerated below:

Eligible assessee – An individual and HUF.

Note: All the other forms of entities (i.e. AOP, BOI, Trust, partnership firms, LLPs, etc.) are neither eligible to claim the beneficial provisions of Section 115BAA or Section 115BAB of the Act (concessional tax regime for companies) nor the provisions of Section 115BAC of the Act. Thus, such entities have no option, but to follow the old regime of taxation.

Background – brief Provisions

The tax rate applicable in case of an eligible assessee under the provisions of Section 115BAC of the Act is as under:

Note: An assessee having a total income of less than INR 5,00,000 shall be eligible for the benefit of rebate under Section 87A of the Act up to an amount of INR 12,500. Accordingly, there shall be no tax outflow in case of an assessee having income less than INR 5,00,000.

Conditions for availing the new regime

An eligible assessee wanting to opt for the new regime should follow the conditions as mentioned below:

Deductions not eligible to be claimed:

• Note that the carried forward losses or unabsorbed additional depreciation, if any, shall not be eligible to be set-off by the assessee. The losses not set-off shall also not be allowed to be carried forward to future years.
• Similar to the provisions of Section 115BAA / Section 115BAB of Act, the amount of unabsorbed additional depreciation not allowed to be set-off shall be added to the opening WDV of the block of asset as on 1 April 2020.

Illustration: An assessee has brought forward unabsorbed additional depreciation of INR 100, with opening WDV of the Plant and Machinery as on 1 April 2020 at INR 250.

Now, the assessee opting for the new regime, will not be eligible to set-off or carry forward and set-off unabsorbed additional depreciation if he opts for the new regime under Section 115BAC of the Act. Thus, the unabsorbed additional depreciation not set-off (INR 100 in this case) will be added to the opening WDV as on 1 April 2020 (i.e. INR 250). Accordingly, the assessee will be eligible for a depreciation on INR 350 (INR 250 + INR 100) during the FY 2020-21.

Notes:

1. On a technical reading of Section 115BAC of the Act, it appears that the option of adjusting the unabsorbed additional depreciation against the opening WDV is available only if the assessee opts for the new regime in FY 2020-21. This option would not be available in the subsequent years. However, there are arguments to suggest that the unabsorbed additional depreciation may be adjusted against the opening WDV even if the assessee opts for the new regime after FY 2020-21. This view may not be free from doubt and involve litigation at the lower levels.

2. The restriction on deduction under Section 24(b) of the Act is provided only in respect of SOP / vacant property. Thus, in case of a let-out property (‘LOP’), the deduction of interest on loan under Section 24(b) shall be eligible to be claimed by the assessee while computing the income from house property.

3. The loss under the head ‘Income from House Property’ from LOP, if any, even though pertaining to current year, shall not be allowed to be set-off against any other head of income.

Illustration: During FY 2020-21, the assessee having following income opts for new regime of tax under Section 115BAC of the Act:

• Salary income – INR 12,00,000
• Interest on housing loan paid on SOP – INR 1,75,000
• Net Loss from LOP – INR 2,00,000 (i.e. gross rent receivable = INR 50,000 and Interest on loan = INR 2,50,000)
• Other Income – INR 3,00,000

In this case, the interest on SOP of INR 1,75,000 would not be available as a deduction and the net loss from LOP of INR 2,00,000 would not be available for set-off against salary income and other income. Thus, total income would be computed at INR 15,00,000 and net loss from LOP of INR 2,00,000 cannot be carried forward to future years.

Deductions eligible for claim:

Claim to opt for new regime

Where to file a claim?

An eligible assessee shall opt for the new regime while filing his return of income under Section 139(1) of the Act.

Question 1: Will the assessee be eligible to claim the benefit of this Section in the following cases:

• If a belated return is filed under Section 139(4) of the Act; or
• A revised return is filed under Section 139(5) of the Act; or
• A return filed under Section 148 of the Act (in case of re-assessment).

Author’s view: On a plain reading of Section 115BAC of the Act, it appears that this Section can be exercised only before filing a return of income under Section 139(1) of the Act. If the intent was to give benefit even in case of belated returns, the wordings of the Section 115BAC would have been drafted differently.

Based on the drafting of the Section, it can be inferred that the benefit of opting for the new regime has been deliberately restricted to cases where a return has been filed on / before time. Thus, in our view, the benefit of Section 115BAC of the Act should not be available in the case of a belated return.

In the case of a revised return [under Section 139(5) of the Act] or a return filed under Section 148 of the Act (in case of re-assessment), the assessee will have the option to opt for the new regime under Section 115BAC of the Act only where such option has been exercised by the assessee while filing the original return of income filed under Section 139(1) of the Act.

Periodicity of claim

Question 2: An eligible assessee (a sole proprietor having a business) opts for the new regime in Year 1. In Year 2, he could not claim the benefit of this section on account of filing a belated return under Section 139(4) of the Act (assuming the benefit of Section 115BAC is not allowed in case of a belated return). Thus, he filed a return under the old tax regime in Year 2.

In Year 3, can he again file the return by availing the benefit of Section 115BAC of the Act?

Author’s view: The relevant extract of Section 115BAC(5) of the Act is reproduced as under:

“…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 option under this section, except where such person ceases to have any income from business or profession in which case, option under clause (ii) shall be available…” (Emphasis supplied)

As per the provisions of Section 115BAC of the Act (second proviso to sub-section 1 and proviso to sub-section 5), in our view, an assessee (having income from business / profession) will not be permitted to opt for the new regime of taxation if:

• Condition 1 – He has withdrawn the option exercised in a previous year; or
• Condition 2 – He has claimed any exemptions / deductions not permissible to be claimed under the new regime (mentioned above).

Condition 1 – In the aforesaid case, the assessee has not ‘withdrawn’ the option granted as per Section 115BAC(5) of the Act in Year 2. He was not eligible to avail the option on account of filing a belated return of income. Thus, Condition 1 has not been breached.

Condition 2 – In the aforesaid case, if the assessee is forced to file a return of income in Year 2 under the old regime (on account of filing a belated return of income), but he does not claim any deductions / exemptions which are not permitted to be granted under the new regime, then, it may be possible to adopt a view that the assessee is not debarred from opting to be taxed under the new regime in Year 3.

However, the above interpretation is not free from doubt. It may be challenged by the tax authorities and trigger litigation at the lower levels.

Conclusion / Way forward

• An eligible assessee to do a detailed financial analysis and choose the best option applicable as per the facts of his case and exercise the same.
• The employer to obtain declarations from the employee to opt for the new regime and withhold tax based on the provisions of Section 115BAC.