Understanding Section 115BAC – New Income Tax Regime, Is it Beneficial for us?

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In this Post, we can analyze the provision relating to New Tax Regime, which helps us to decide whether to choose with the tax regime or to continue with the old tax regime.

During the Budget 2020 speech, the Finance Minister Nirmala Sitharaman announced the insertion of a new section called 115BAC into the Income Tax Act in the Union Budget 2020. Section 115 BAC deals with an optional income tax regime for individuals and Hindu Undivided Families (HUFs) with lower tax rates and zero deductions/exemptions. The new system is applicable for income earned from 1 April 2020 (FY 2020-21), which relates to AY 2021-22. The new tax regime saves taxes for taxpayers who don’t claim any deductions or exemptions.

The tax rates under the new tax regime and the old tax regime are:

Tax Rate

Deductions, exemptions not available in new tax regime:

Individuals will have to forgo almost all tax breaks that they were claiming in the old tax structure. The important tax breaks that will not be available under the new tax regime include Section 80C (Investments in PF, NPS, Life insurance premium, home loan principal repayment, etc.), Section 80D (medical insurance premium), tax breaks on HRA (House Rent Allowance) and on interest paid on housing loan. Tax breaks for the disabled and for charitable donations will also go.

The individuals will have to work out their tax liability under the old and new tax regime before deciding which one is more beneficial.
list of the main exemptions and deductions that taxpayers will have to forgo if they opt for the new regime.

  • Leave travel allowance exemption which is currently available to salaried employees twice in a block of four years
  • House rent allowance normally paid to salaried individuals as part of the salary. This could be claimed as tax-exempt up to certain specified limits if the individual was staying in rented accommodation
  • Standard deduction of Rs 50,000 currently available to salaried taxpayers
  • Deduction u/s 80TTA(Deduction in respect of Interest on deposits in a savings account) and 80TTB(Deduction in respect of Interest on deposits to senior citizens)
  • Deduction for entertainment allowance (for government employees) and employment/professional tax as contained in section 16
  • Deduction of Rs 15000 allowed from family pension
  • section 80C deductions claimed for provident fund contributions, life insurance premium, school tuition fee for children, and various specified investments such as ELSS, NPS, PPF, etc. However, deduction section 80CCD (employer contribution on account of the employee in a notified pension scheme—mostly NPS) and section 80JJAA (for new employment) can still be claimed
  • The deduction claimed for medical insurance premium under section 80D will also not be claimable
  • Tax benefits for disability under sections 80DD and 80DDB will not be claimable
  • Tax break on interest paid on education loan will not be claimable-section 80E
  • Tax break on donations to charitable institutions available under section 80G will not be available

In short, all deductions under chapter VIA (like section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc) will not be claimable by those Choosing for the new tax regime.

Deductions, exemptions available in new tax regime:

Taxpayers claim tax exemption for:

  1. Transport allowances in 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.

Brief about the new tax regime

  • Section 115BAC of the Income Tax Act is applicable for Individuals and HUF’s who can have a choice of taking the new income tax slab rates.
  • The new Tax Regime attracts the taxpayers by its lower tax rates, but the major portion of deductions and exemptions have been withdrawn
  • The new income tax regime is optional; the taxpayer can opt-in and opt-out every year. That means the Taxpayer can choose the new tax regime in one year and choose the regular tax regime in another year.
  • A taxpayer having any business income in the assessable financial year cannot opt for the New Tax Regime.
  • There is no change in the surcharge Rate & Cess Rate. In both the Tax Regime, the Surcharge & Cess Rate remains the same.
  • If the individual or HUF fails to satisfy any of the conditions mentioned in Section 115BAC. The option to pay income tax as per the new regime can become invalid for the relevant financial year,

How do the TaxPayers choose between the new tax regime and the existing regime?

The new tax regime may be beneficial for a High-level Income group whose tax-saving investments are very minimum. But for Lower & middle-Income group who invest in various tax savings schemes can better opt for Old tax regime itself.

Since there is no proper method to decide between the two Tax regimes. For Better Understanding, Tax Payers must calculate the total tax outgo as per both the old and new slab rates before deciding whether to adopt Section 115BAC slab rates or not.

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