Section 115BAC: Is the new Income Tax Regime beneficial?

Friends, with the blessings of the Almighty, we will soon battle out and overcome this unfortunate COVID-19 outbreak and the current essential lock-down period will also pass shortly.

1. The new FY 2020-21 corresponding to the AY 2021-22, has already started w.e.f 1.4.2020. So, it is very essential on our part to be equipped and ready with an informed, wise and timely decision concerning the opting or not of the new personal tax regime u/s 115BAC of the Income Tax Act, 1961.

A lot has already been written about the new personal tax regime u/s 115BAC of the Income Tax Act, 1961, but the silver-lining of this article is its "Break-Even Point Analysis", between the New Personal Tax Regime of Reduced Tax Rates with No Deductions and the Old Personal Tax Regime with Higher Tax Rates with Deductions, in terms of Specified Deductions, at all levels of incomes of Individuals & HUFs, which has been very comprehensively discussed in para nos. 1.5 onwards of this piece of writing.

However, before that, some basic and fundamental insights concerning this new section 115BAC are also being deliberated upon as under:

1.1 Incorporation of New Personal Taxation Regime of Reduced Tax Rates with No Deductions in Case of Individuals & HUFs (applicable w.e.f. AY 2021-22).

In line with the new regime of reduced corporate tax rates, introduced by the Taxation Laws (Amendment) Act 2019, the Finance Act 2020, has inserted a new section 115BAC, providing for a new personal taxation regime in the cases of individuals and HUFs (hereinafter referred to as 'assessees’), wherein the 'assessees’ have been given the option to either continue with the existing personal tax rates with availment of full specified deductions, or to opt for the new regime of reduced personal tax rates with restrictions on approximately 70% of the specified deductions, currently available to them under different chapters and sections.

1.2 New Personal Tax Slabs

The newly inserted reduced personal tax rates in the case of individuals & HUFs u/s 115BAC, in the Finance Act 2020, applicable w.e.f. AY 2021-22, are as under:

Surcharge and cess shall be continued to be levied at the existing rates.

1.3 'Specified Deductions’ Not Allowed under New Personal Tax Regime of Reduced Taxes:

In order to avail the benefit of reduced tax rates u/s 115BAC, an individual/HUF assessee has to forgo the 'specified deductions’ available to him under various chapters and sections of the Income Tax Act.

So, there is a big catch to this prima-facie 'assessee-beneficial’ regime, and that is the restriction/denial of the most common and recurring deductions like deductions u/s 80C, 80CCD, 80D, HRA, LTA, Standard Deduction, interest on self-occupied/let out property, to name a few.

To be more specific, an individual or HUF opting for the new taxation regime under the newly inserted section 115BAC of the Act shall not be entitled to the following exemptions/ deductions (hereinafter referred to as the "specified deductions"):

1. Leave travel concession as contained in clause (5) of section 10;
2. House rent allowance as contained in clause (13A) of section 10;
3. Some of the allowance as contained in clause (14) of section 10;
4. Allowances to MPs/MLAs as contained in clause (17) of section 10;
5. Allowance for income of minor as contained in clause (32) of section 10;
6. Exemption for SEZ unit contained in section 10AA;
7. Standard deduction, deduction for entertainment allowance and employment/professional tax as contained in section 16;
8. Interest under section 24 in respect of self-occupied or vacant property referred to in sub-section (2) of section 23. (Loss under the head income from house property for rented house shall not be allowed to be set off under any other head and would be allowed to be carried forward as per extant law);
9. Additional deprecation under clause (iia) of sub-section (1) of section 32;
10. Deductions under section 32AD, 33AB, 33ABA;
11. Various deduction for donation for or expenditure on scientific research contained in sub-clause (ii) or sub-clause (iia) or sub-clause (iii) of sub-section (1) or sub-section (2AA) of section 35;
12. Deduction under section 35AD or section 35CCC;
13. Deduction from family pension under clause (iia) of section 57;
14. Any deduction 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). However, deduction under sub-section (2) of section 80CCD (employer contribution on account of employee in notified pension scheme) and section 80JJAA (for new employment) can be claimed.

For ready reference and benefit of the worthy readers, the maximum permissible amounts of the above mentioned "specified deductions", which are available to an individual/HUF assessee, under various sections, and which are required to be forgone, in order to avail the benefit of reduced taxation u/s  115BAC, have been tabulated as under:

It has also been proposed to amend rule 3 of the Rules subsequently, so as to remove exemption in respect of free food and beverage through vouchers provided to the employee, being the person exercising option under the proposed section, by the employer.

1.4 The undermentioned Allowances u/s 10(14) of the Income Tax Act, will continue to remain allowable even under the New Regime of Personal Taxation.

1. Transport Allowance granted to a divyang employee to meet expenditure for the purpose of commuting between place of residence and place of duty
2. Conveyance Allowance granted to meet the expenditure on conveyance in performance of duties of an office;
3. Any Allowance granted to meet the cost of travel on tour or on transfer;
4. Daily Allowance to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty.

This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the AY 2021-22 and subsequent assessment years.

The primary reason for introduction of this new personal taxation regime u/s 115BAC, as intended, has been to be simplification of tax laws, however, ironically, during the transition phase, it is resulting in more complicated scenarios, wherein, the individual and HUF assessees are faced with the difficult and intriguing question and choice of opting for one of the two personal taxation regimes, in order to optimise their taxes.   

Therefore, with a view to simplify this complication, a comprehensive 'BREAK-EVEN POINT ANALYSIS’, has been done in ensuing paragraphs, so as to guide and assist the worthy readers, in making good and informative choice and decision of opting for their most optimum tax regimes.

1.5 Break- Even Point Analysis between New & Old Personal Tax Regime

The Break-Even Point i.e. the point where both the new regime of reduced tax rates with no 'specified deductions’ and the old regime of increased tax rates with 'specified deductions’, for all the Income Levels/ Ranges, have been tabulated in Master Table I and have been computed in Tables 1, 2, 3 4 & 5, below, for ready reference and benefit of the worthy readers.

Break-Even Point in Terms of 'Specified Deductions’

Usually an individual/HUF assessee has a fair bit of idea about his income range or level. So, at a particular income level, he is faced with the choice of deciding either to avail the 'specified deductions’ by making investments etc under various sections like 80C, 80CCC, 80CCD in Chapter VIA, to name a few, under the old tax regime or to forgo the specified deductions, to avail the benefit of reduced tax rates u/s 115BAC under the new regime.

For ready reference and the benefit of the worthy readers, the break-even point in terms of 'specified deductions’, at different levels of 'income’ have been tabulated in Master Table I, based on detailed computations in Tables 1, 2, 3, 4 & 5, below.

As a thumb rule, the Individuals/HUFs (assessees), having the undermentioned annual incomes will benefit from the new personal tax regime of reduced tax rates u/s 115BAC, only if they are availing 'specified deductions’ either less than or equal to the 'specified deductions’ at the 'highlighted break-even point’ in the below Tables.

However, if the assesses are availing more 'specified deductions’, than those at the break-even point, then they will benefit more in the old regime, of increased tax rates, in terms of their nett. tax outflows.

1.5.1 MASTER TABLE I

1.5.1a TABLE 1: Annual Income Range of Rs. 5 lakhs to Rs 7.5 lakhs

A Comparative Analysis between the New and Old Personal Tax Regime, for the Income Range of Rs. 5 lakhs to Rs 7.5 lakhs, has been tabulated below.

As can be seen from above table, that an individual or HUF having an annual income of up to Rs. 5 lakhs, will be at par in both the regimes.

An individual/HUF having an annual income of Rs. 5.5 lakhs will benefit from the new regime of reduced personal tax rates only if he is availing the "specified deductions" of less than or equal to Rs. 25,000/-, in a financial year.

However, if the amount of the "specified deductions" available to him is in excess of Rs. 25,000/-, then the assessee will benefit more by continuing with the old personal tax regime, as his tax outflows will be less as compared to the new regime.

So, an individual/HUF assessee, having an annual income of Rs. 5.5 lakhs, will 'break-even’ or will be 'at par’ between the new and old personal tax regime, if he is availing 'specified deductions’ of Rs. 25,000/- in a financial year.

Uptill this break-even point in terms of 'specified deductions’, he will benefit more in new tax regime and beyond this break-even point, he will benefit more in old tax regime.

Similarly, an individual/HUF assessee, having an annual income of Rs. 6/6.5/7/7.5 lakhs respectively,

will benefit from the new regime of reduced personal tax rates only if he is availing the "specified deductions" of less than or equal to Rs. 0.5/0.75/1/1.25 lakhs respectively/-.

So, the break-even points in terms of 'specified deductions’, for an individual/HUF assessee having an annual income of Rs. 6/6.5/7/7.5 lakhs respectively, are Rs. 0.5/0.75/1/1.25 lakhs respectively/-, in a financial year.

Similarly, the break-even points in terms of 'specified deductions’, for an individual/HUF assessee having annual income ranging from Rs. 8 lakhs to 15 lakhs and above, have been computed and tabulated in Tables 2, 3, 4 & 5, as under:

1.5.1b TABLE 2: Annual Income Range of Rs. 8 lakhs to Rs 10 lakhs

1.5.1c TABLE 3: Annual Income Range of Rs. 10 lakhs to Rs 12.5 lakhs

1.5.1d TABLE 4: Annual Income Range of Rs. 13 lakhs to Rs 15 lakhs

1.5.1e TABLE 5: Annual Income Range of Rs. 16 lakhs & Above

1.6 Time, Form & Manner of Exercise of Option for Availing the Benefit of Reduced Tax Rates u/s 115BAC

(i) the concessional rate shall not apply unless option is exercised by the individual or HUF in the form and manner as may be prescribed-

a. where such individual or HUF has no business income, along with the return of income to be furnished under sub-section (1) of section 139 of the Act; and

b. in any other case, on or before the due date specified under sub-section (1) of section 139 of the Act for furnishing the return of income for any previous year relevant to the assessment year commencing on or after 1st April, 2021 and such option once exercised shall apply to subsequent assessment years.

1.7 Period of Exercising Option:

(i) An individual/HUF assessee, having no business or professional income, can exercise his option of choosing between the two tax regimes, every year, based on his entitlement of 'specified deductions’.

So, an individual/HUF assessee, having income under the heads 'Salary’, 'House Property’, 'Capital Gains’ and 'Income from Other Sources’, can opt for the new tax regime in one financial year, and can go back to the old tax regime in subsequent financial year, depending upon the circumstances and entitlement of 'specified deductions’.

(ii) An individual/HUF assessee, having business or professional income, can opt for the new tax regime of reduced taxes with no deductions, u/s 115BAC, only once and the option once exercised, for a previous year shall be valid for that previous year and all subsequent years.

(iii) The option of the new tax regime u/s 115BAC shall become invalid for a previous year or previous years, as the case may be, if the Individual or HUF fails to satisfy the conditions and other provisions as stipulated in section 115BAC of the Income Tax Act.

(iv) the option can be withdrawn only once where it was exercised by the individual or HUF having business income for a previous year other than the year in which it was exercised and thereafter, the individual or HUF shall never be eligible to exercise option under this section, except where such individual or HUF ceases to have any business income.

1.8 Concluding Remarks

In the preceding paragraphs, an honest and sincere attempt has been made to work out and analyse all the possible permutations and combinations of income levels of an individual and HUF assessee and the specified deductions, available to him, and a break-even point, between the old regime and the new regime of personal tax, in all the income levels, in terms of the availability of specified deductions, has been worked out.

Thus, these detailed computations will surely serve as a ready referencer for all the individual/HUF assessees and the tax professionals, to make informed and most appropriate choices of their tax structures in order to optimise their taxes.

Before parting, just wish to convey my loving Readers,

"Stay Healthy, Safe & Productive in this Lock-down period and keep reading and loving my write-ups and Books."