The introduction of Section 115BAC in the Income Tax Act has provided taxpayers with an alternative tax regime featuring lower income tax rates for individual taxpayers and Hindu Undivided Families (HUFs). This section, introduced by the Finance Act, 2020, became applicable from the assessment year 2021-22. With the latest amendments effective from the assessment year 2024-25, the scope and conditions under Section 115BAC have undergone significant changes. This blog explores these updates and helps you understand whether opting for this concessional tax regime is beneficial for you.
What is Section 115BAC?
Section 115BAC provides an option for individual taxpayers and HUFs to pay tax at reduced rates if they forego certain exemptions and deductions. It aims to simplify tax computation and compliance by offering a straightforward, lower-tax-rate regime without the benefits of various deductions available under the old tax system.
Tax Rates under Section 115BAC
1. Assessment Years 2021-22 to 2023-24
| Total Income (₹) | Rate of Tax (%) |
|---|---|
| Up to ₹2,50,000 | Nil |
| ₹2,50,001 to ₹5,00,000 | 5% |
| ₹5,00,001 to ₹7,50,000 | 10% |
| ₹7,50,001 to ₹10,00,000 | 15% |
| ₹10,00,001 to ₹12,50,000 | 20% |
| ₹12,50,001 to ₹15,00,000 | 25% |
| Above ₹15,00,000 | 30% |
2. Assessment Year 2024-25 Onwards
| Total Income (₹) | Rate of Tax (%) |
|---|---|
| Up to ₹3,00,000 | Nil |
| ₹3,00,001 to ₹6,00,000 | 5% |
| ₹6,00,001 to ₹9,00,000 | 10% |
| ₹9,00,001 to ₹12,00,000 | 15% |
| ₹12,00,001 to ₹15,00,000 | 20% |
| Above ₹15,00,000 | 30% |
The amendment has increased the income threshold for the Nil tax rate from ₹2,50,000 to ₹3,00,000 and adjusted the other tax slabs accordingly, making it more favorable for taxpayers.
Rebate under Section 87A
To further enhance tax benefits, the rebate under Section 87A has also been revised:
- Assessment Years 2021-22 to 2023-24: Individuals with a total income up to ₹5,00,000 are eligible for a rebate of up to ₹12,500, resulting in no tax liability.
- From Assessment Year 2024-25: The rebate has been increased to ₹25,000 for individuals with a total income up to ₹7,00,000. This change significantly increases the threshold for availing a full tax rebate.
Conditions for Opting for Section 115BAC
Choosing the concessional tax regime under Section 115BAC comes with certain conditions. The taxpayer must forgo various exemptions and deductions that are otherwise available under the old tax regime:
- Exemptions Not Allowed:
- Section 10 Exemptions: Exemptions such as Leave Travel Allowance (LTA), House Rent Allowance (HRA), and allowances for special benefits are not available.
- Other Exemptions: Special provisions like Section 10AA for Special Economic Zones (SEZs) and deductions under Section 16 (standard deduction for salaried employees) are also excluded.
- Deductions Not Allowed:
- Deductions under Chapter VI-A (Sections 80C to 80U), except for specific deductions like 80CCD(2), 80CCH(2), and 80JJAA, are disallowed.
- Interest deductions under Section 24(b) for housing loans are not permitted.
- Restrictions on Loss Set-Off:
- Losses and unabsorbed depreciation that arose from deductions mentioned above cannot be set off against other income.
- Depreciation Claimed Under Section 32:
- While depreciation can be claimed, the taxpayer must adhere to the prescribed manner, and certain depreciation allowances may require adjustments.
Flexibility in Opting for the Concessional Tax Regime
- Taxpayers Without Business Income:
- Individuals without income from a business or profession can choose to opt for Section 115BAC every year when filing their income tax return.
- Taxpayers With Business Income:
- Once the option is exercised, it will apply for subsequent assessment years, and the taxpayer can withdraw it only once. After withdrawal, they cannot opt for Section 115BAC again unless they no longer have business income.
Expansion of Applicability: Assessment Year 2024-25 Onwards
The Finance Act, 2023, expanded the scope of Section 115BAC from the assessment year 2024-25 to include:
- Association of Persons (AOPs)
- Body of Individuals (BOIs)
- Artificial Juridical Persons
This expansion allows these entities to benefit from the concessional tax regime, further extending its advantages to a broader range of taxpayers.
Surcharge and Cess under Section 115BAC
- Surcharge Limits:
- The surcharge rate is capped at 25%, bringing down the maximum marginal tax rate from 42.744% to 39%. This reduced surcharge is beneficial for taxpayers with income above ₹2 crores.
- Health and Education Cess:
- A 4% cess is applicable on the tax plus surcharge, which remains unchanged from the previous regime.
Marginal Relief and Special Provisions
The regime provides for marginal relief to ensure that the additional tax payable does not exceed the incremental income that triggers the higher surcharge rate. Additionally, special provisions apply to specific entities such as AOPs consisting only of companies, capping the surcharge at 15%.
Comparative Analysis: Old vs. New Tax Regime
Deciding between the old and the new tax regime requires an understanding of the deductions and exemptions you typically claim. Here’s a comparative analysis for different income levels:
- Income up to ₹8.25 Lakhs:
- If you claim deductions under Sections 80C and 80CCD(1B), the old regime may still be beneficial.
- Income between ₹8.25 Lakhs and ₹9.5 Lakhs:
- With deductions, the old regime may continue to provide better savings.
- Income above ₹12.75 Lakhs:
- For individuals with higher income and few deductions, the new regime may offer more tax savings due to lower rates.
FAQs
1. Can I switch back to the old tax regime after opting for Section 115BAC?
Yes, you can switch back if you do not have business income. However, if you have business income, the option to withdraw can be exercised only once.
2. What happens if I have unabsorbed depreciation?
If you opt for Section 115BAC, the unabsorbed depreciation related to disallowed deductions will be considered fully set off.
3. Are there any special provisions for those working in Special Economic Zones (SEZs)?
No, deductions under Section 10AA related to SEZs are not allowed under the new concessional tax regime.
This blog aims to provide a detailed understanding of Section 115BAC to help you make informed tax decisions. If you have more questions, feel free to reach out to our tax experts at Smart Tax Saver.
Conclusion
The amendments to Section 115BAC from the assessment year 2024-25 have made the concessional tax regime more attractive, especially for individuals with moderate income and limited deductions. With an increased rebate under Section 87A and revised tax slabs, taxpayers now have a viable alternative to the traditional tax system.
Choosing between the old and new regime depends on individual circumstances, particularly the extent of exemptions and deductions you avail. Evaluating your tax liabilities under both regimes before filing the return will help you make an informed choice.
