Section 115BAC of Income Tax Act, 1961: A step towards the New-Normal
“The Indian Income Tax Law witnesses every year a gamut of amendments presented in the Union Budget, in tune with the ever-changing, socio-economic scenario. The implication of such changes pervades almost every stratum of society and class across the nation. Finance Act, 2020, inserted a new section 115BAC to the Income Tax Act, 1961, commonly known as ‘New Tax Scheme’, applicable from Assessment Year 2021-22. The new section meant for Individual and Hindu Undivided Family (HUF) will bring about a paradigm shift in the way Income Tax is computed and perceived. Let us dive deeper and dissect all the possible angles of this new provision. Read on…”
1 Background
The Income Tax Act, 1961, provides a wide range of deductions from and exemptions of income while computing Total Income and Tax Liability of the taxpayer. Majority of these deductions are enumerated under Chapter VIA of Income Tax Act (Sections 80C to 80U) which is based on various investments/payments. Some deductions/allowances are specific to the Head of Income, for example, statutory deduction & allowances under the head ‘Salary Income’, investment-linked deductions under the head ‘Profits and Gains from Business & Profession’. Also, there are numerous provisions for Inter/Intra head setting-off and carrying forward of losses. Overall, the intent behind such deductions/exemptions/allowances is to lower one’s taxable income and reduce the final tax liability.
The new section 115BAC has a kind ‘forgoing’ effect as it dispenses with many of such deductions, allowances and exemptions.
2 Analysis of Section 115BAC
Applicability: The new section is applicable only for ‘Individual’ and ‘Hindu Undivided Family (HUF)’ from Assessment Year 2021-2022. If one opts for this New Tax Scheme, the new income tax-rates will be applicable. Following table shows a comparison between the tax-rates under normal provisions and the tax rates under the New Tax Scheme:
| Sl. No. | Total Income | Rate of Tax under New Tax Scheme (%) | Rate of Tax under Normal Provisions (%) |
|---|---|---|---|
| 1. | Up to ₹ 2,50,000 | Nil Rate | Nil Rate |
| 2. | From ₹ 2,50,001 to ₹ 5,00,000 | 5 % | 5 % |
| 3. | From ₹ 5,00,001 to ₹ 7,50,000 | 10 % | 20 % |
| 4. | From ₹ 7,50,001 to ₹ 10,00,000 | 15 % | 20 % |
| 5. | From ₹ 10,00,001 to ₹ 12,50,000 | 20 % | 30 % |
| 6. | From ₹ 12,50,001 to ₹ 15,00,000 | 25 % | 30 % |
| 7. | Above ₹ 15,00,000 | 30 % | 30 % |
- Rebate under section 87A: Rebate under section 87A up to ₹ 12,500 will be allowed to resident individuals if the Total Income is less than ₹ 5,00,000.
- Category of Assessee: The ‘Individual’ may be a resident or non-resident, senior citizen or a very senior citizen.
“Under the New Tax Scheme, sub-section 2 of section 115BAC of the Income Tax Act states that total-income will be calculated without taking into effect certain deductions, exemptions, allowances, and brought forward losses.”
3 Forgoing of Deductions, Exemptions and Allowances
Under the New Tax Scheme, sub-section 2 of section 115BAC of the Income Tax Act states that total-income will be calculated without taking into effect certain deductions, exemptions, allowances, and brought forward losses. These have been explained as follows:
1. Deductions & Allowances under the Head ‘Salary’ Disallowed
Following deductions/allowances under the head ‘salary’ will not be allowed under the new tax scheme:
- The standard deduction of Rs 50,000, professional tax and entertainment allowance [section 16].
- Leave Travel Concession Allowance (LTA) [Section 10(5)].
- House Rent Allowance (HRA) [section 10(13A)].
- Minor child income allowance [section 10(32)].
- Allowances to MPs/MLA [section 10(17)].
- Children education allowance.
- Some special allowances under section 10(14): children education allowance, hostel expenditure allowance, allowance on transfer from one city to another.
- Exemption or deduction for any other perquisites or allowances.
- Transport allowances in case of a differently abled person (Divyang Employee).
- Conveyance allowance received to meet the conveyance expenditure incurred as part of the employment.
- Any compensation received to meet the cost of travel on tour or transfer.
- Daily allowance received to meet the ordinary daily charges or expenditure which employees incur on account of absence from his/her regular place of duty.
2. Deductions under the Head ‘Other Sources’
Under the head ‘Other Sources’, deduction from family pension income [section 57(iia)] will not be allowed under the new tax scheme.
3. Exemptions Retained and Business/Profession Deductions Disallowed
Exemptions Retained: Certain exemptions like interest income on Public Provident Fund (PPF) and interest income on ‘Sukanya Samriddhi’ Scheme will be available under the New Tax Scheme.
Deductions Disallowed under ‘Business or Profession’: Under the head ‘Business or Profession’, following will be not allowed under the new tax scheme:
- Additional depreciation under section 32(1)(iia) for new plant and machinery. It is to be mentioned that ‘normal’ depreciation will be allowed.
- Investment allowance under section 32AD.
- Sector-specific business deductions under section 33AB (Tea, Coffee and Rubber producers) and 33ABA (extraction or production of, petroleum or natural gas or both).
- Expenditure on scientific research under section 35.
- Capital expenditure under section 35AD.
- Deduction u/s 35CCC for expenditure on agricultural extension project.
- Exemption under section 10AA for Special Economic Zones (SEZ) units.
4. Deductions under Chapter VI-A
Under Chapter VI-A: Deductions under sections 80C to 80U will not be allowed.
However, deductions under Section 80CCD(2) [contribution by employer under notified pension scheme on behalf of an employee] and under section 80JJAA [in respect of additional employment cost of new employees] will be allowed. Also ‘units’ covered under ‘International Financial Services Centre’ under section 80LA (1A) will be eligible for deduction under 80LA even if they opt for the new tax Scheme.
4 Set Off of Losses
Brought Forward Losses and Unabsorbed Depreciation
Brought forward losses and unabsorbed depreciation of earlier years to the extent they relate to the deductions/exemptions withdrawn cannot be set off or carried forward in the new tax scheme. Also, such unabsorbed depreciation (relating to additional depreciation) will be adjusted from the opening written down value (WDV) of the block of assets.
A Relevant Question: A relevant question might arise: Whether such Brought forward losses or unabsorbed depreciation pertaining to A.Y. 2020-21 or before will be considered or will they be considered up to the year when such option under New Tax Scheme is exercised? The concerned authorities are expected to provide more clarity on this matter.
Losses under the Head ‘House Property’
- For Self-Occupied or Vacant House Property: Interest on housing loan on such property (Section 24) will not be allowed under the new tax scheme.
- For Let out House Property: Standard deduction of 30% and deduction of municipal taxes will be allowed under the new tax scheme. Interest on housing loan will be allowed only to the extent of income under this head. In other words, loss from any let-out property can be allowed to be set off against income from other house property and not from any other head of income. Moreover, such loss from let out property will not be allowed to carry forward in subsequent years.
“Standard deduction of 30% and deduction of municipal taxes will be allowed under the new tax scheme. Interest on housing loan will be allowed only to the extent of income under this head.”
Following is an example when an Individual or HUF opts for the new tax scheme:
| Particulars | House 1 | House 2 |
|---|---|---|
| Rental Income | ₹ 2,40,000 | ₹ 90,000 |
| Less: Standard Deduction @ 30%: | ₹ 72,000 | ₹ 27,000 |
| Net Annual Value after Standard Deduction | ₹ 1,68,000 | ₹ 63,000 |
| Less: Interest on loan against House 1 | ₹ 1,75,000.00 | ₹ 0 |
| Income/(Loss) under House Property | ₹ (7,000) | ₹ 63,000 |
This loss of Rs 7000 can be set off against income of House 2, Rs. 63,000. If no such income is there, such loss cannot be set off from any other head of income and will also not allowed to be carried forward to any subsequent year.
On the contrary, if the new tax scheme is not opted, then such loss from house property is allowed to be set off from any other head of income (up to Rs 2 lakh) and is also allowed to be carried forward under the normal provisions.
Author’s Observation: The restrictions on setting off or carrying forward of losses under section 115BAC are quite stringent which may prevent the taxpayer from exercising the option despite the concessional tax rates. Some relaxations need to be provided in order to encourage taxpayers to opt for the new tax scheme.
5 When and How the Option under New Tax Scheme is to be Exercised?
This new tax scheme is not mandatory but optional subject to some conditions. The option is to be exercised by filing Form 10-IE online before the due date of Income Tax Return under section 139(1) of the Income Tax Act.
Author’s Observation: Reading the bare provisions, section 115BAC states that the option can be exercised only before filing Income Tax return under Section 139(1) of the Act. Other sections for belated return u/s 139(4) and revised return u/s 139(5) are not mentioned. Accordingly, it seems that benefit for opting the new tax scheme is restricted only to income tax returns filed under 139(1), and does not extend to belated returns. However, in case of revised return, if the original return was filed under section 139(1) after opting the new tax scheme, then logically new tax scheme will be available for such revised return. Clarification is awaited from the Income Tax authorities on this matter.
Following explains the conditions for the option to be exercised:
1. If the Taxpayer is Having Income from Business and Profession
The taxpayer can opt for taxation under this new scheme either in A.Y. 2021-22 or in any subsequent year. If the option is exercised, the new scheme will be applicable for subsequent years also. After the option is exercised, the taxpayer can withdraw from this scheme only once in a subsequent year, i.e., the taxpayer cannot choose to opt in again once he/she opts out of the scheme. The table below is for more clarity:
| Sl No. | Nature of Income | Assessment Year | Status |
|---|---|---|---|
| 1 | Business or Profession | 2021-2022 | Option under 115BAC not exercised. Normal provisions applicable. |
| 2 | Business or Profession | 2022-2023 | Option under 115BAC exercised for the first time. ‘New Tax Scheme’ applicable. |
| 3 | Business or Profession | 2023-2024 | New Tax Scheme Applicable |
| 4 | Business or Profession | 2024-2025 | New Tax Scheme Applicable |
| 5 | 2025-2026 | Taxpayer withdraws from this option (can only opt out once). So Normal provisions will be applicable for this A.Y. and subsequent years. |
From Assessment year 2026-2027 onwards, the taxpayer cannot opt again for New Tax Scheme. However, if the taxpayer ceases to have income from Business and Profession, the taxpayer can again opt under the New Tax Scheme.
2. If the Taxpayer Does Not Have Income from Business or Profession
In this case, the taxpayer can decide to opt in or opt out every year, without any restriction.
Clarification from CBDT (Circular No. C1/2020 dated 13.04.2020)
Since the option under section 115BAC is required to be exercised at the time of filing of the return, the Deductor of TDS, being an employer, would not know if employee opts for the new tax scheme. Hence, there was a lack of clarity regarding whether the provisions of section 115BAC are to be considered at the time of deducting tax.
CBDT has issued clarification via circular no. C1/2020 dated 13.04.2020 which is explained as follows:
- Employees having no Business or Professional Income: The employee taxpayer has to inform/intimate the employer whether or not the option of new tax regime will be exercised. If the employee doesn’t inform, the employer will deduct TDS on employee’s income computed under the normal provisions of Income Tax Act. The intimation to the employer about the exercise of the new option is not equivalent to the exercise of the option under the new tax scheme. In other words, irrespective of the intimation, the employee taxpayer can exercise the option at the time of filing of return which will be considered final.
- Employees having Business or Professional Income: In this case, the employees need not inform/intimate the employer regarding the exercise of option at the time of deduction of TDS. The reason: since Assessment Year 2021-22 is the first year of section 115BAC, the employee taxpayer having business or professional income will need time to decide carefully about the option to be exercised. The employer will deduct TDS under normal provisions of Income Tax Act. Once such employee has exercised the option under 115BAC at the time of filing of Income Tax Return, the employee will have to intimate/inform the employer about the same. The employer, accordingly, will deduct TDS under the new tax scheme for the subsequent assessment years.
“The employee taxpayer has to inform/intimate the employer whether or not the option of new tax regime will be exercised. If the employee doesn’t inform, the employer will deduct TDS on employee’s income computed under the normal provisions of Income Tax Act.”
6 Other Points for Consideration
- Reduced Tax Rates versus Forgoing of Several Benefits: As the new tax slab is comparatively beneficial compared to the old tax slab in terms of reduced tax rates, the new tax scheme, prima facie, seems to be better. However, since many significant deductions/exemptions will have to be forgone, hence the tax payer has to compute total income and tax liability under both Old and New methods and choose accordingly.
- Impact on Specified Business: Specified Businesses covered under section 35AD, viz, Cold Storage, Warehousing facility for agriculture produce, specified hotels, specified hospitals, etc, are eligible to get 100% deduction towards capital expenditure under the normal provisions of the Income Tax Act. Also, the businesses involved in scientific research are eligible to get deduction towards scientific research expenditure under normal provisions. Since these deductions are done away under the new tax scheme of section 115BAC, it is unlikely that these specified businesses will opt for the new tax scheme.
In near future, it is possible that the new tax scheme might be made compulsory. In such a case, the government must come up with certain relaxations and relief for the benefit of such specified businesses.
7 Conclusion
The new tax scheme under section 115BAC is a significant step in the Indian Income Tax Law. The concessional tax rates under the scheme will encourage the taxpayers to offer income with more transparency. However, since there is a crucial departure from many important deductions and exemptions, taxpayers might initially face dilemma while transitioning to the new tax scheme. Also, possible misinterpretations of these new provisions might crop up and lead to litigations. Both income taxpayers and practitioners will have to tread carefully while filing Income Tax Return in the coming years.