Unraveling Section 115 BAC 1(A): Making sense of the New Income Tax Regime

The Finance Act of 2020 introduced a revamped tax regime for individuals and Hindu Undivided Families (HUFs), featuring altered tax slabs and rates. Individuals and HUFs meeting the stipulated conditions are given the choice to compute tax on their total income without factoring in specified deductions or exemptions.

This choice is exercised at the time of filing income tax returns, utilizing new slab rates as opposed to the traditional ones. The intricacies of income tax regulations have a profound impact on individuals and households, shaping financial decisions and influencing economic choices. In the financial year 2023-24 (assessment year 2024-25), the landscape of income tax has undergone significant changes with the introduction of revised income tax slabs and rates.

A crucial distinction emerges between the old and new tax regimes, with the latter offering lower tax rates. However, this benefit comes at the cost of eliminating numerous deductions and exemptions that were prevalent in the traditional tax system. The table serves as a roadmap, delineating the income slabs and corresponding tax rates, guiding taxpayers in understanding the financial implications of their income under both regimes.

Through this article we take a look at the revised income tax slabs and rates, the applicability of the new tax regime, and the considerations for different income categories. It serves as a valuable guide for taxpayers navigating the complexities of the evolving income tax landscape. The article also sheds light on the computation of tax payable under both regimes without claiming deductions/exemptions for FY 2023-24 (AY 2024-25), demonstrating potential tax savings for taxpayers opting for the new regime.

 The revised income tax slabs and rates under the new tax regime for FY 2023-24 (AY 2024-25) and FY 2022-23 (AY 2023-24) are provided in the table below:

The tax rates under the new tax regime and the old tax regime for FY 2022-23 (AY 2023-24) are compared, indicating that the new tax regime does not allow 70+ deductions and exemptions. The tax payable under both regimes without claiming deductions/exemptions for FY 2023-24 (AY 2024-25) is presented, showing potential tax savings for taxpayers under the new regime. The new tax regime becomes the default for the Assessment Year 2024–2025. To opt out of this regime, the assessee must exercise their choice under section 115BAC(6).

When it comes to the taxation of salary income, understanding the old tax regime versus the new tax regime under Section 115BAC is crucial. Salary income is taxable based on either the due basis or receipt basis, whichever occurs first. Even if an employer owes an employee salary that remains unpaid during the year, it’s still subject to taxation.

Section 115 BAC for Taxpayers with Business Income

For taxpayers with business income, once the option is exercised, it remains applicable for successive financial years. Intimations must be conveyed to the employer, and once made, they cannot be altered for subsequent financial years unless specific conditions are met. This reinforces the importance of careful consideration and informed decision-making for taxpayers with business income under Section 115 BAC of the Income Tax Act.

 Calculation of Taxable Salary Income (Comparison between Old Tax Regime and New Tax Regime of Section 115BAC): Salary income falls under taxation on a due basis or receipt basis, depending on which occurs first. Any salary due from an employer to an employee, even if unpaid during the year, becomes chargeable to tax.

The computation of salary income is as follows:

The normal tax rates are prescribed annually under the First Schedule of the Finance Act. The tax rates for individuals are detailed in the table below:

Net income range Resident Super Senior Citizen Resident Senior Citizen Any other Individual

‘Super senior citizen’ refers to an individual aged 80 years or more during the relevant previous year.

‘Senior citizen’ refers to an individual aged 60 years or more during the relevant previous year but less than 80 years on the last day of the previous year.

 Section 115BAC Slab Rates: Tax Rates Under the New Regime

Comparing the New and Old Regime Tax Slab Rates:

Applicability of the New Tax Regime for FY 2023-24

The new tax regime, also known as the alternative tax regime, applies to the following entities:

●      Individuals

●  HUF (Hindu Undivided Family)

●  Association of Persons (AOP)

●  Body of Individuals (BOI)

●  Artificial Juridical person

Section 115BAC introduces a new tax regime, giving individuals and HUF taxpayers the choice to pay income tax at lower rates, effective from FY 2020-21 (AY 2021-22).Starting from FY 2020-21, individuals and HUFs have the option to pay income tax under an optional new tax regime, characterized by lower tax rates and reduced deductions/exemptions. The features of the new tax regime and its potential benefits are discussed below.

To be eligible for the new tax regime under Section 115BAC for the assessment year 2023-24, individuals and HUFs must meet specific conditions:

●      Exclude various deductions/exemptions under specified sections, including Chapter VI-A, 35/35AD/35CCC, 57(iia), 24(b), 10/10AA/16, 32(1)/32AD/33AB/33ABA.

●  No offsetting of losses from previous assessment years related to the mentioned deductions or losses from house property.

●  Exclude any deductions/exemptions related to perquisites or allowances.

●  Do not claim depreciation as per clause (iia) of Section 32.

●  Submit Form 10IE on the income tax portal before filing ITR.

Rebate under Section 87A:

For the old tax regime, a resident individual is eligible for a rebate of up to Rs. 12,500 under Section 87A if the total income does not exceed Rs. 500,000. In the new tax regime, a resident individual paying tax under Section 115BAC may receive a higher rebate under Section 87A if the total income is up to Rs. 7,00,000, with a marginal rebate applicable if the income marginally exceeds Rs. 7,00,000.

In the existing income tax regime, under section 87A, a rebate of Rs. 12,500 is granted if the total income of a resident individual does not exceed Rs. 5,00,000. However, this rebate is limited to Rs. 12,500, and if the total income surpasses Rs. 5,00,000, no rebate is applicable.

A new provision has been introduced in section 87A by the Finance Act, 2023, effective from April 1, 2024, applicable for the financial year 2023-24. The proviso states that if the total income of the taxpayer is chargeable to tax under sub-section (1A) of section 115BAC, the following deductions from the income tax amount are allowed:

(a) If the total income does not exceed seven hundred thousand rupees, the taxpayer is entitled to a deduction equal to one hundred per cent of the income tax on their total income or an amount of twenty-five thousand rupees, whichever is less.

(b) If the total income exceeds seven hundred thousand rupees and the income tax payable on such total income exceeds the excess amount over seven hundred thousand rupees, the taxpayer is entitled to a deduction equal to the amount by which the income tax payable on the total income surpasses the excess amount over seven hundred thousand rupees.

This provision offers a higher rebate to individuals, HUFs, Associations of Persons (AOPs), BOIs, and artificial juridical persons opting for the new tax regime under section 115BAC(1A) of the Income Tax Act. The rebate under section 87A is applicable if the total income during the previous year does not exceed Rs. 7,00,000, and the rebate is limited to Rs. 25,000. No rebate is available if the total income exceeds Rs. 7,00,000.

With the introduction of this proviso, even if an individual’s income slightly exceeds Rs. 7,00,000, a tax rebate will be available, and the taxpayer is required to pay tax only on the additional income earned. This provision helps prevent a situation where additional tax liabilities arise in the old regime due to a marginal increase in income.

Surcharge Rates:

In respect of an individual, the surcharge rates for the assessment year 2024-25 are as follows:

Nature of Income Range of Total Income

Conclusion

The Finance Act of 2020 brought about a significant transformation in the income tax landscape for individuals and Hindu Undivided Families (HUFs) by introducing a revamped tax regime. The new tax regime provides altered tax slabs and rates, giving taxpayers the option to compute tax on their total income without considering specified deductions or exemptions. This choice, exercised at the time of filing income tax returns, employs new slab rates distinct from the traditional ones.

The financial year 2023-24 marked substantial changes in income tax regulations, impacting individuals and households. A crucial distinction between the old and new tax regimes lies in the lower tax rates offered by the latter, albeit at the expense of eliminating numerous deductions and exemptions present in the traditional system.

It emphasizes that the new tax regime becomes the default for the Assessment Year 2024–2025, and to opt-out, the assessee must exercise their choice under section 115BAC(6).

Understanding the old tax regime and the new tax regime is important for understanding the critical aspects of taxation of salary. Under Section 115BAC, the taxation of salary income is based on either the due basis or receipt basis, whichever occurs first.

Section 115 BAC is particularly advantageous for taxpayers without tax-saving investments or those unwilling to make such investments in the foreseeable future. Individuals falling within the income tax slab of Rs. 5 lakhs to Rs. 10 lakhs stand to benefit from the lower tax rates offered by the new provision.

Conversely, individuals with an annual income exceeding Rs. 15 lakhs would derive more benefits from the existing system by leveraging tax-saving investments. It is imperative for everyone to scrutinize their tax-saving investments and assess income tax implications before making a decision on the preferred tax regime.

For taxpayers with business income, the article elucidates that once the option is exercised under Section 115BAC, it remains applicable for successive financial years. Intimations to the employer must be made, and once exercised, the choice cannot be altered for subsequent financial years unless specific conditions are met.

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