Section 115 BAC of Income Tax Act

In recent years, the Indian government has introduced several measures to rationalize the taxation structure. It has contributed to the positive growth of tax revenue for the government, while easing the compliance burden on taxpayers. In fact, according to the income tax department, the direct tax collections have grown at a rate of 19.54% in the current financial year.

Building on this momentum, Budget 2020 introduced a new tax regime by adding Section 115BAC to the Income Tax Act. You should read this section as its provisions can help you avail yourself of lower rates and reduce tax liability.

What is Section 115BAC of the New Tax Regime?

Section 115BAC of Income Tax Act, 1961 offers an alternative tax regime for individual taxpayers and Hindu Undivided Families (HUFs) earning income from sources other than business or profession. It presents lower tax rates across income slabs. This new regime was introduced to reduce the complexities involved in filing tax returns by eliminating the need for multiple deductions and exemptions.

Income Tax Slab Rates Under Section 115BAC

The tax rates under Section 115BAC of Income Tax Act are lower as compared to the old regime. Here is a comparison of both structures.

Please note that the Budget 2024 has introduced new slabs for Assessment Year 2025-26, further lowering the tax rates as follows:

Eligibility Criteria for the New Tax Regime Under 115BAC of Income Tax Act

If you are curious about whether you are eligible for the new tax regime, you should become aware of the amendments introduced by the Finance Act 2023.

If you fall under the category of individual, HUF, AOP (Association of Persons), BOI (Body of Individuals), or Artificial Juridical Person, the new tax regime will apply to you by default. This means that your income will be taxed as per the new rates.

This income must, however, be computed keeping in mind the following:

• The income must not be earned from business or profession.
• Deductions such as those falling under Chapter VI-A, Section 24 (b), specified clauses of Section 10, Section 16, and more cannot be claimed. All information about these deductions can be found in sub-section 2 of 115BAC.
• Losses from previous years cannot be set off if they can be attributed to the deductions mentioned in the above point.
• Exemption related to House Rent Allowance (HRA) cannot be claimed.
• Depreciation under section 32(iia) is not available as a deduction.

Exemptions and Deductions of Section 115BAC of Income Tax Act

In addition to offering lower tax rates, Section 115BAC also allows you to claim certain deductions that can further reduce tax liability. These include:

• A standard deduction of ₹75,000 for salaried employees
• Perquisites provided for official purposes
• Specific allowances, such as those for conveyance and daily expenses
• Interest on home loans for properties that are let out
• Gifts up to ₹50,000
• Benefits from voluntary retirement, gratuity, and leave encashment
• Employer contributions to the NPS account under Section 80CCD(2)
• Deductions under Section 80CCH
• Additional employee costs as per Section 80JJAA
• Income from family pension under Section 57(iia)

Deductions that are Not Claimable Under Section 115BAC

If the new tax rates are lower and provide deductions, then what is the need for old tax rates? Here’s the catch: there are certain deductions that you cannot claim under Section 115BAC of Income Tax Act.

• ₹1.5 lakh deduction for investments like PPF, ELSS, life insurance premiums, and more under Section 80C
• Tax exemption under 80D for health insurance premiums for yourself, family, and parents, which can range between ₹25,000 to ₹1,00,000
• Interest paid on education loans as per Section 80E
• Section 80TTA/TTB deduction for interest earned on savings accounts
• Employee contribution to NPS
• Professional tax
• Salary allowances like HRA, Leave Travel Allowance or LTA allowance, Children Education Allowance, meal coupons, etc
• Interest on loans for self-occupied or vacant house property
• Donation to political party/trust

Conclusion

In simple words, you can either opt for the old tax regime and avail of all deductions or choose the new regime for lower tax rates but limited deductions. You can compare the tax liability under both regimes using online tax calculators and select the best one.

As the new regime has been set as the default option for taxpayers, you must especially inform your employer if you want to switch to the old regime. You must also exercise the option under Section 115BAC(6) and opt out of the default regime while filing your returns. Moreover, if you are earning business income, you must file a declaration in Form 10-IEA to be taxed under the old regime.

FAQs on Section 115 BAC of Income Tax Act