In attempts to cope up increasing demand to reduce tax rates as well as current Government’s commitment to lower tax burden on not so-rich tax payers, various provisions are introduced during the recent years, to name a few – Sections 115BA, 115BAA, 115BAB, 115BAC and 115BAD. These sections intend to lower tax burden on taxpayers viz. domestic companies, individuals, HUFs and resident co-operative societies. However, one of the most crucial parts of these sections is that it does not allow taxpayers to claim various major allowances and deductions as otherwise allowable under the income tax provisions.
The Finance Act, 2020 introduced sections 115BAC and 115BAD which are applicable to individuals / HUFsand resident co-operative societies respectively with effect from Previous Year (PY) 2020-21 relevant to Assessment Year (AY) 2021-22. These sections restrict tax payers to claim few of the important allowances including additional depreciation and deductions allowable under sections 80C, 80D, 80G, 80GGC, 80TTA, 80TTB etc. which are always in preferential list of tax payers to achieve their objective to save, invest and lower tax.
Newly inserted section 115BAC provides for reduced tax rates (now commonly known as tax rates under new regime)as per below mention net or total taxable income slabs compared to persistent tax rates for said slabs (accordingly known as old regime tax rates):
| Total Taxable Income(Rs.) | Rate of tax under – | Reduction in rate of tax if opt under this section | Estimated reduction in tax amount (Rs.) # | |
| Old Regime | New Regime | |||
| Upto 2,50,000 | 0 % | 0 % | – | – |
| From 2,50,001 to 5,00,000 | 5 % | 5 % | – | – |
| From 5,00,001 to 7,50,000 | 20 % | 10 % | 10 % | 25,000 |
| From 7,50,001 to 10,00,000 | 20 % | 15 % | 5 % | 12,500 |
| From 10,00,001 to 12,50,000 | 30 % | 20 % | 10 % | 25,000 |
| From 12,50,001 to 15,00,000 | 30 % | 25 % | 5 % | 12,500 |
| Above 15,00,000 | 30 % | 30 % | – | – |
# tax amount is computed before surcharge and cess addition.
In order to understand the crucial nature of this section, let us cleave it into two parts based on applicability of section to assessees having income from sources other than‘business or profession’ and second for those earning income from said source as well.Part 1: For assessees not having income from business or profession –
With aim to lower tax liability by opting under section 115BAC,assessees viz. individualsand HUFsneed to comply with critical conditions mention in sub-section (2) as referred below:
I. Deductions or Exemptions which will not be allowed to claim –
a. Few exemptions under section 10, namely:
1. Leave travel allowance – Clause (5),
2. House rent allowance – Clause (13A),
3. Certain official and personal allowance – Clause (14),
4. Allowances received by reason of being MLA or MP – Clause (17),
5. Exemption from clubbed income of minor child – Clause (32),
b. Deduction under section 10AA – Special provisions in respect of Units established in Special Economic Zones,
c. Standard deduction which is otherwise allowable up to Rs. 50,000 from salary income, entertainment allowance (for Government employees) and professional tax, as per provisions of section 16,
d. Interest paid on borrowed loan for purchase or construction of self-occupied property – section 24(b),
e. Deduction from family pension income – section 57(iia),or
f. Deductionsbased on expenditure, investment or certain income under Chapter VI-Aother than section 80CCD(2) being deduction on account of employer’s contribution towards pension scheme(note: deduction under section 80LA can be claim by assessees having Unit in IFSC),
II. The loss under the head ‘income from house property’ will not be allowed to be set-off against any other head of income in the current year and such deficiency cannot be carried forward to subsequent financial year.
In case, the assessee fails to comply with any of the above conditions mention in point I&II in any financial year, then the assessee will not be allowed to pay tax as per the lower rates specified in the section for that particular financial year and accordingly, other normal provisions of the income tax act (‘the act’) will apply.
For instance,an assessee, say Mr. Ravi, opts for lower tax rates under section 115BAC for FY 2021-22. He, however, claims deduction for payment of life insurance premium for himself as per section 80C, then in such scenario, he will not be allowed to compute his tax liability as per the lower tax rates prescribed under this section for the year i.e. FY 2021-22. Consequently, other normal provisions of the act shall apply to him for such year.
Further, a unique benefit is given under sub-section (5)(ii) to assessees covered under this part i.e. having income other than income from business or profession, with option to take benefit under this section for each respective year while filing return of income for each such year under section 139(1).
Many observations can be drawn in view of above mention provisions of section 115BAC which are essential to understand before opting for the section. The observations are summarised, based on analysis of both the parts of this article, which forms part in last phase.
Part 2: For assessees having income from business or profession –
In addition to restrictions imposed as mention in para I&II of part 1, assessees viz. individuals and HUFs having income from business or profession need to comply with following additional restrictions to opt for lower rate of tax under section 115BAC –
I. Deductions which will not be allowed to claim –
1. Additional depreciation – section 32(1)(iia),
2. In respect to investment in new plant or machinery in notified backward areas – section 32AD,
3. In respect to investment deposits – section 32AB,
4. In respect to site restoration fund – section 33ABA,
5. Expenditure on account of certain scientific research – section 35(1)(ii) or (1)(iia) or (1)(iii) or (2A),
6. In respect to expenditure on specified business – section 35AD, or
7. In respect to expenditure on agricultural extension project – section 35CCC
II. Set-off of brought forward losses or unabsorbed additional depreciation (in relation to sections referred in point (I) above) will not be allowed. Further, such unadjusted losses or depreciation will not be allowed to carry forward to subsequent financial year.
Though the restrictions imposed by the section intend toway part with many important and required allowances or deductions, few are specifically excluded from the above and thereby allowing assessees to claim such benefits being:
1. Depreciation allowance under normal provisions (i.e. other than additional depreciation) – Section 32,
2. Deduction in respect of wages cost incurred for new employees – section 80JJAA
In addition to the above referred benefits, the section also allows to make adjustment to the written down value of block of assets as on 01.04.2020 (also known as opening WDV for FY 2020-21) on account of unabsorbed depreciation allowance of earlier years (i.e. pertaining to FY 2019-20 or earlier).
This means, say there is unabsorbed additional depreciation pertaining to FY 2019-20 of Rs. 25 lakhs and opening WDV as on 01.04.2020 is Rs. 115 lakhs then such assessee can adjust the opening WDV to Rs. 140 lakhs i.e. by adding brought forward unabsorbed additional depreciation of Rs. 25 lakhs to the said opening WDV.
Major disadvantage:
Now, other than above, the main drawback for assessees earning income from business or profession is non-flexibility to opt for lower rate of tax under this section on year-to-year basis. In simpler words, there is restriction for such assessees to opt for section 115BAC only once while filing return of income under section 139(1) for any year on or after FY 2020-21 and such option will apply to all subsequent year.
However, the section allows such assessee to withdraw from such option only once in any subsequent year after the year in which it is first opted and with no option to take benefit of lower rate of tax under this section ever again except in cases when such assessee will not have income from business or profession from any year. So, when such assessee ceases to have income from business or profession, flexibility to opt for section 115BAC from year-to-year basis will be applicable as available to assessees not having income from business or profession.
To understand this provision, let say an assessee, Mr. Darshan earned income from trading business and other sources during FY 2021-22. While filing return of income under section 139(1) for said year, he opts for section 115BAC. He continued to opt for the section for next 3 years i.e. till FY 2024-25. However, while filing return for FY 2025-26, he chooses not to opt for the section and filed return of income showing income from business and other sources by computing tax liability as per normal provisions of the act. Then in such case, he will not be allowed to opt for lower rate of tax under this section in any subsequent year. Thus, this section is in nature of once in a lifetime option as per the current provisions.
However, he can again opt for section 115BAC and that to with flexibility to opt for the section on year-to-year basis, if in any subsequent year he ceases to have income from business.
Various observations can be drawn as well from the above mention provisions which are summarised in last phase of analysis continued in subsequent part.
Part 3: Conclusion –
i. With the prima facie tempted lower rate of tax for individuals and HUFs, there is a huge cost of giving up various deductions and allowances which are in nature of encouraging investment in businesses eventually creating employment, development of backward areas, promoting agricultural projects, scientific research, etc.
ii. Although, interest paid on let-out property is allowed to be claim by assessees opting for section 115BAC, set-off of unadjusted loss arising out of such interest expense against any other head and carry forward of the same to subsequent year will not be allowed.
iii. The section specifies that an assessee can opt for lower rate of tax while filing return of income under section 139(1). This means, that in case assessee misses the due date as specified in section 139(1) then the option will not be available for that particular year.
So now, question arises, that in case of assessee having income from business or profession, will it be assumed that such assessee have withdrawn from section 115BAC if he do not file return of income within the due date specified in section 139(1) but file it belatedly as per section 139(4) for any year subsequent to the year in which such assessee first opted for said section.
If affirmative contention is drawn, then such assessee will not be able to opt for this section in any of the subsequent year till the time business or profession is carried on.
In other way, assessee can always argue that there is no intention to opt out of section 115BAC and filling belated return is just in nature of procedural error. Accordingly, non-filing of return within the due date as specified in section 139(1) cannot take away the right to opt for said section for subsequent years.
iv. Also, it is to be understood that in case any of the restrictions is not complied with by the assessee opting for this section in any year then the lower rate of tax will not be allowed to such assessee for that year.
Consequently, in case of an assessee, having income from business or profession, who does not comply with any of the restrictions in any year subsequent to the year in which it is first opted for, such assessee will not be allowed to opt for this section in any of the subsequent year till the time business or profession is carried on.
v. The assessees, not having income from business or profession, will have to compute their tax liability under both the regime every year and choose beneficial option which have increase a task for either assessees or, in mostcases, their tax consultants.
Further, this section creates unprotected situation for assessees, having income from business or profession, who will need to have an in-depth clarity on estimated future income as well benefits which may arise by availing various deductions or allowances rather than giving them up after opting for this section. Since, any mistake in such calculation or any unforeseen circumstance in future, will lead such assessee to either opt out of section 115BAC for lifetime or may end up paying extra tax just to ensure continued applicability of the section.
Accordingly, utmost care is to be taken by assessees, or tax consultants before opting for section 115BAC in case of any individual or HUF.
vi. Further, this kind of reduced tax rate sections have inherent nature which can kill the habit of investing and saving among large number of people who were investing in tax-saving funds firstly, just to pay lower tax and secondly, to have future income from the same. This habit took longer to get develop, specifically, in our country and with introduction of this section, hit is expected for entities in various industries particularly engaged in life insurance sector, term deposit business of banks or post office, health insurance, etc.”
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