Section 115BAC of Income Tax Act: All that you need to know about New Tax Regime

Hello taxpayers! Let’s address a common myth surrounding the new tax regime in India — the belief that you cannot claim any deductions under this regime. This misconception often arises due to the significant changes introduced in how deductions are handled compared to the old tax regime. Let’s dive deeper into understanding deductions under the new tax regime.

What is Section 115BAC – The New Tax Regime?

The new tax regime is a simplified tax structure introduced in Budget 2020, under which taxpayers can pay lower taxes but have to forego maximum deductions and exemptions. The new tax regime has lower tax rates than the old regime but eliminates the tax benefits of various investments and expenses.

The new income tax regime offers several benefits, including a simplified tax structure with lower rates, reduced tax liability, and increased disposable income for taxpayers. By eliminating various deductions and exemptions, it streamlines tax compliance, saving time and effort for taxpayers.

Here are 8 advantages of the new tax regime to taxpayers:

1)Lower Tax Rates

Taxpayers can benefit from lower tax rates under the new regime, resulting in reduced tax liability and higher disposable income.

“The government has been pushing the new tax regime by making it more attractive for taxpayers. The new tax regime provides the taxpayers with a substantially lower tax rate.

2) Simplified Tax Structure

The new regime simplifies the tax structure by offering lower tax rates

Income Tax Slabs in New Tax

3)No Tax Deductions

The new regime eliminates the need to track and claim deductions, saving time and effort for taxpayers.

“Further, the taxpayers also do not have the hassle of collecting and providing details and evidence for expenditure and investments.

4) Basic exemption limit

“The basic exemption limit has been elevated from ₹2.5 lakh to ₹3 lakh. This increased exemption limit makes the novel tax regime more appealing. Note that the highest tax rate, i.e., 30%, will be imposed on income exceeding Rs15 lakh.

5) Changes in the Surcharge Rate

The implementation of the new tax regime leads to a reduction in the surcharge rate from 37% to 25%. This is applicable for individuals with income exceeding ₹5 Crores. This reduced surcharge rate is valid only for those taxpayers who choose the new tax regime and have an income exceeding ₹5 crore.

6) Changes in the Rebate

The introduction of the new tax regime has increased the rebate limit. “As per the old tax regime, the applicable rebate limit is ₹12,500 for incomes up to Rs.5 lakhs. However, under the new tax regime, this rebate limit has increased to ₹25,000 if the taxable income is less than or equal to ₹7 lakh. Note that the Section 87A rebate is applicable under both income tax regimes. Then, the budget announcement increased the taxable limit to ₹7 lakhs from ₹5 lakh under the new tax regime.

6) Standard Deduction

Salaried individuals’ standard deduction under both the old and the new regime is ₹50,000.

Old vs New Tax Regime: Which Is Better New Or Old Tax Regime For Salaried Employees?

The Budget 2023 caused a lot of confusion among taxpayers regarding the choice between the old and new tax regimes. The government introduced various incentives in the 2023 Budget to encourage the adoption of the new regime.

These changes show that the government intends to have taxpayers transition to the new regime and eventually phase out the old one. Though the new regime is now the default tax regime, the old tax regime will continue to exist.

Interim Budget 2024-2025 Updates: 

No changes were made in direct taxes in the Interim Budget 2024-2025.

Let’s look at both regimes and see which regime to opt for in 2024.

New Tax Regime

A new tax regime was introduced in Budget 2020 wherein the tax slabs were altered, and taxpayers were offered concessional tax rates. However, those who opt for the new regime cannot claim several exemptions and deductions, such as HRA, LTA, 80C, 80D , and more. Because of this, the new tax regime did not have many takers. The government in the Budget 2023 introduced 5 key changes, which remain the same even for FY 2024-2025 since no changes were made in the Interim Budget 2024, to encourage taxpayers to adopt the new regime. They are:

• Higher Tax Rebate Limit:Full tax rebate on an income up to ₹7 lakhs has been introduced. Whereas this threshold is ₹5 lakhs under the old tax regime. This means that taxpayers with an income of up to ₹7 lakhs will not have to pay any tax at all under the new tax regime!
• Streamlined Tax Slabs:The tax exemption limit has been increased to ₹3 lakhs, and the new tax slabs are:
• The tax rates under both regimes are compared as below:

Comparison of Deductions under Old Regime vs. New Regime for FY 2023-24

List of Deduction not available under New Regime

• Deductions u/ Section 80C, 80D, 80E, 80CCC, 80CCD, 80DD, 80DDB, 80EE, 80EEA, 80G, etc. of Chapter VI-A of IT Act
• Professional Tax
• Entertainment Allowance on Salaries
• House Rent Allowance (HRA)
• Leave Travel Allowance (LTA)
• Helper Allowance
• Child Education Allowance
• Minor Child Income Allowance
• Interest on Housing Loan Self-Occupied/ Vacant Property
• Other Special Allowance u/ Section 10(14)
• Employee’s Contributions to NPS Account
• Donations to Political Parties/ Trusts
• Additional Depreciation u/ Sec 32
• Investment Allowance u/ Section 32AD
• Sector-wise Deductions for Businesses u/ Section 33AB and 22ABA
• Expenditure on Research & Development u/ Section 35
• Expenses on Capital Expansion u/ Section 35AD
• Exemptions u/ Section 10AA for Units in SEZ
• Depreciation and Losses in the Business

The Eligibility Criteria for the New Tax Regime on Section 115BAC

For the assessment year 2024-25, individuals and Hindu Undivided Families (HUFs) have to pay the taxes under the new tax regimes unless they choose to opt in for the old regime while filing the return of income before the due date. Under the new tax regime, the total income should meet the below-mentioned conditions:

• Income calculation is done without considering any deductions or exemptions mentioned below:
  • All deductions under Chapter VI-A, except those specified in section 80CCD/80JJAA.
  • Deductions specified in Section 35/35AD/35CCC.
  • Clause (iia) of Section 57.
  • Deductions specified in Section 24b.
  • Clause (5)/(13A)/(14)/(17)/(32) of Section 10/10AA/16.
  • Deductions specified in Section 32(1)/32AD/33AB/33ABA.
• The calculation is performed without offsetting any losses from previous assessment years resulting from the above deductions or losses from house property.
• The calculation does not consider any deductions or exemptions related to perquisites or allowances.
• The calculation is performed without claiming any additional depreciation as per clause (iia) of Section 32.

What are the Exemptions and Deductions Available Under the New Regime?

Under the New tax regime, you can claim tax exemption for the following:

1. Transport allowancesin case of a specially-abled person.
2. Conveyance allowance received to meet the conveyance expenditure incurred as part of the employment.
3. Any compensation received to meet the cost of travel on tour or transfer.
4. Daily allowance received to meet the ordinary regular charges or expenditure you incur on account of absence from his regular place of duty.
5. Perquisites for official purposes
6. Exemption on voluntary retirement 10(10C), gratuity u/s 10(10) and Leave encashment u/s 10(10AA)
7. Interest on Home Loan on let-out property (Section 24)
8. Gifts up to Rs 50,000
9. Deduction for employer’s contribution to NPS account [Section 80CCD(2)]
10. Deduction for additional employee cost (Section 80JJA)
11. Budget 2023 introduced a standard deduction of Rs 50,000 under New Tax Regime applicable from FY 2023-24
12. Budget 2023also introduced deduction under Section 57(iia) of family pension income
13. Budget 2023further introduced deduction of amount paid or deposited in the Agniveer Corpus Fund under Section 80CCH(2)

House Property Loss Under the New Tax Regime

In the case of a self-occupied property, you cannot claim a deduction on interest for a housing loan under the new tax regime. The deduction of Rs 2 lakh allowed in the existing system is not available in the new tax regime. Also, you cannot set off the loss of Rs 2 lakh from house property from your salary income.

If you have let out house property, you can claim a deduction for interest paid on the housing loan. Note that the new tax regime restricts the deduction to the taxable rent received from the property against the old regime. In the new regime, you cannot set off the loss arising from the house property due to excess interest paid over the rental income with any other head of income. Also, you cannot carry forward the loss from house property to future years for set off.

Deductions Not Allowed Against Business Income Under the New Regime

Deductions and exemptions not allowed against business income:

1. Additional depreciation under section 32
2. Investment allowance under section 32AD
3. Sector-specific business deductions under section 33AB and 33ABA
4. Expenditure on scientific research under section 35
5. Capital expenditure under section 35AD
6. Exemption under section 10AA for SEZ units

Unabsorbed Depreciation and Business Loss Under the New Regime

In the case of a business income, an individual or HUF cannot claim set-off of the brought forward business loss or unabsorbed depreciation.

The deductions are not available under the new regime to the extent they relate to deductions/exemptions withdrawn.

How to Choose Between Old and New Tax Regimes?

When deciding between the two tax regimes, it is important to take into account the tax exemptions and deductions available under the old tax regime. After deducting all eligible exemptions and deductions, the net taxable income can be determined. By calculating the tax liability based on this net taxable income under the old tax regime, it becomes possible to compare it with the tax liability under the new tax regime.

Choosing the regime with the lower tax liability is the logical approach, and it is essential to inform the employer about this choice so that the appropriate Tax Deducted at Source (TDS) can be deducted from the salary.

If you have a loss from house property, capital gains, or business & profession, you need to consider them as well while making informed decisions on the selection of regime. Along with the current year’s losses, even the previous year’s losses eligible to set off will get lapsed as well. Ineligibility to carry forward such losses may impact your future income determination and taxes thereon.

Wrapping it up

Many individuals often find themselves questioning the disparities between the old and new tax regimes. The new income tax regime is designed to accommodate those who have more personal commitments such as repayment of personal/vehicle loans, medical treatment of parents or dependents, or wish to avoid the burden of extensive tax preparation or have minimal tax deductions due to their ineligibility for section 10 exemptions, standard deductions, tax on employment, employer contribution to pension scheme etc., Conversely, the old tax regime can yield more tax savings for senior citizens, who derive a substantial portion of their income from interest, can benefit from Section 80TTB, which allows them to claim Rs.50,000 as interest income deduction and feel more secure under the old tax regime.

Both the old and new tax regimes possess advantages and disadvantages. The previous tax structure encourages taxpayers to cultivate a habit of saving, while the new tax structure favours employees with lower earnings and investments, resulting in fewer deductions and exemptions. The new tax system is considered safer and simpler, involving fewer records and reducing the potential for tax evasion fraud. However, due to the unique nature of individual deductions and exemptions, a thorough comparison of the two regimes is necessary to determine the best fit for each person.

Conclusion

Based on the provided information, it is evident that the current tax regime offers advantages for the specified income level. If an individual chooses to claim fewer deductions for tax savings, such as investments in NPS or health insurance, the new regime becomes more advantageous compared to individuals who rely on tax-saving investments.

It is important to consider that individuals with an income ranging from Rs.5 lakh to Rs.10 lakh, who opt for lower deductions, will benefit from the new regime. Conversely, individuals falling into higher income tax brackets, earning more than Rs.15 lakh annually, can benefit from the old regime by utilising tax-saving investments.

The new tax regime offers taxpayers the option to choose between lower tax rates and limited deductions or higher tax rates and multiple deductions and exemptions as per the Union Budget 2024.

It is important for taxpayers to carefully evaluate their deductions in both these tax regimes. Choose the one that best suits your financial goals and circumstances.