Section 115BAC: New Optional Income Tax Regime for Individual/HUF in India

New Optional Income Tax Rates, Exemptions & Deductions Availability analysis

New Optional income tax regime for Individuals and HUF has been proposed in the budget 2020. This scheme provides an option to the tax-payers to pay tax at reduced rates subject to fulfillment of certain conditions. The incentive of lower tax has been provided by the insertion of a new section 115BAC in the Income Tax Act. It will be applicable from the FY 2020-21(AY 2021-22).
Let’s understand this proposed scheme in detail-

 

New Income Tax Slab Rates under the optional tax regime :

As per Budget 2020 the individual and HUF taxpayers including

  • Those aged less than 60 years
  • 60-80 Years and (senior citizens)
  • Aged 80 & above (super-senior citizens)
  • Non residents

Are allowed to make a choice of income tax slab on the basis of which they will like to pay taxes from FY 2020-21. To know more about the existing tax slab and the new optional tax slabs introduced under section 115BAC let read further

Income Tax Slab from FY 2020-21 Tax Rate under the optional tax regime Existing Tax Rate
Upto Rs 2.5 Lakhs Exempt Exempt
Rs 2.5- Rs 5 Lakhs 5% 5%
Rs 5- Rs 7.5 Lakhs 10% 20%
Rs 7.5 -Rs 10 Lakhs 15% 20%
Rs 10 - Rs 12.5 Lakhs 20% 30%
Rs 12.5 - Rs 15 Lakhs 25% 30%
Above Rs 15 Lakhs 30% 30%

After the Budget 2020 people are getting confused that there will be no tax on an income upto Rs.5 lakh. Which is partially true. The basic exemption limit has still been kept unchanged i.e. there will be no tax upto Rs 2.5lakhs for an individual/HUF. But, if the income of such taxpayer does not exceed Rs 5 lakhs then no tax would be payable after availing the benefit of rebate u/s 87A.
As soon as your taxable income crosses the threshold of Rs 5lakhs the benefit u/s 87A will not be available and tax would be payable at 5% for the income above Rs 2.5 lakhs but upto Rs 5lakhs. Let us understand this with the help of an example

Particulars Existing Tax Rate FY 2020-21 Existing Tax Rate FY 2020-21 New Optional Tax Rate FY 2020-21 New Optional Tax Rate FY 2020-21
Taxable Income 5,00,000 6,00,000 5,00,000 6,00,000
Less: Basic Exemption Limit 2,50,000 2,50,000 2,50,000 2,50,000
Taxable income after basic exemption limit 2,50,000 3,50,000 2,50,000 3,50,000
Tax Rate @5% on Rs 2,50,000 @5% on Rs 2,50,000 + @20% on Rs 1,00,000 @5% on Rs 2,50,000 @5% on Rs 2,50,000 + @10% on Rs 1,00,000
Tax Computed 12,500 32,500 12,500 22,500
Less: Rebate u/s 87A 12,500 - 12,500 -
Tax Payable* - 32,500 - 22,500

*The above calculations are excluding cess.

What are the conditions to be Fulfilled for Lower Tax Rate

  • This option can be taken by the individual or the HUF who has no business income.
  • The option once exercised for a previous year shall be valid for that previous year and all subsequent years.
  • The option 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 applicable provisions of the Act.
  • Option is also available for persons having the business income subject to certain conditions.

List of Income Tax Deductions & Exemption not available

The person opting for the new scheme under section 115BAC shall not be entitled to the following exemptions/ deductions:

  • (i) Leave travel concession u/s section 10(5);
  • (ii) House rent allowance u/s section 10(13A);
  • (iii) Some of the allowance as contained in section 10(14);
  • (iv) Allowances to MPs/MLAs as contained in section 10(17);
  • (v) Allowance for the income of minor as contained in section 10(32);
  • (vi) Exemption for SEZ unit contained in section 10AA;
  • (vii) The standard deduction, a deduction for entertainment allowance and employment/professional tax as contained in section 16;
  • (viii) 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 the 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);
  • (ix) Additional depreciation under section 32(1)(iia);
  • (x) Deductions under section 32AD, 33AB, 33ABA;
  • (xi) Various deduction for donation for or expenditure on scientific research contained in section 35(2AA) or 35(1)(ii) or (iia) or (iii);
  • (xii) Deduction under section 35AD or section 35CCC;
  • (xiii) Deduction from family pension under section 57(iia);
  • (xiv) 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 section 80CCD(2) (employer contribution on account of the employee in notified pension scheme) and section 80JJAA (for new employment) can be claimed.
  • (xv) It is also proposed to amend rule 3 of the Rules subsequently, so as to remove an 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.

Allowances Allowed under new option

Only following under section 10(14) are allowed to the Individual or HUF :

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

Which income tax slab is applicable for FY 2020-21 (AY 2021-22)?

For the FY 2020-21 (AY 2021-22) the taxpayer can choose amongst the old and new tax regime.The new optional tax regime has reduced income tax rate but without benefit of deductions and allowances and the existing tax slabs can be used with the benefits of deductions and exemptions. Let’s get a comparative study of the pros and cons of both tax slabs available to the taxpayer

OPTION I: OLD TAX SLABS OPTION II: NEW TAX REGIME 
Applicability Applicable to Individual, HUF, AOP, BOI, AJP Individual & HUF
Chapter VI A Deductions Available Not available except 80CCD(2), 80JJAA, 
Allowances and Exemptions Available Not available as specified
Suitable for Taxpayers who are willing to take benefit of allowances like HRA, LTA etc and have contributions to PPF, LIC, PF, Home Loan repayment, donations, medical policies, NPS and other eligible tax saving instruments etc  Those who do not have tax-saving investments / exemptions and are not willing to make the same anytime sooner. Normally more suitable for New employees, low tax bracket earners or senior citizens willing to have greater liquidity in hand at the old age. 
Rebate u/s 87A Available Available
Health & Education Cess 4% 4%
Surcharge Applicable Applicable at same rates
Basic Exemption Limit  The basic exemption limit under the old scheme were Rs 2,50,000 for those aged less than 60 years Rs 3,00,000 for senior citizens Rs 5,00,000 for super senior citizens Under the new tax regime there is only one exemption limit of Rs 2,50,000 which is applicable for both individuals and HUF

How can my tax payable be affected under the new optional income tax regime applicable for FY 2020-21 (AY 2021-22)?

Your tax outflow will be effected in a below-depicted manner under the new tax structure. For calculations, taxable income has been taken after all the deductions and allowances allowed (if any)

Taxable Income for New FY 2020-21 New Tax Rate Tax Payable Existing Tax Rate Tax Payable
Upto 2,50,000 Exempt - Exempt -
From 2,50,001- 5,00,000 5% 12,500 5% 12,500
From 5,00,001-7,50,000 10% 25,000 20% 50,000
From 7,50,001-10,00,000 15% 37,500 20% 50,000
From 10,00,001-12,50,000 20% 50,000 30% 75,000
From 12,50,001-15,00,000 25% 62,500 30% 75,000
Above Rs 15 Lakhs 30% To be calculated on the basis of income 30% To be calculated on the basis of income

Frequently Asked Questions

Q- What are the conditions for availing optional new income tax regime by a person having income from business?

Ans. A Person having business income can opt to pay tax as per the new tax slab structure if

  • To claim benefit of proposed tax rates, option is exercised, on or before the due date of return of income u/s 139(1).
  • Option once exercised can be withdrawn only once.
  • In case of assessee ceases to have business income, option can be exercised again.

In case of Business income, the option once exercised for a previous year shall by default be valid for that financial year and all subsequent years as well.


CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.