Section 115BAC: Features of the new tax regime and its benefits

From FY 2020-21, you can choose to pay income tax under an optional new tax regime. The new tax regime is available for individuals and HUFs with lower tax rates and zero deductions/exemptions. We will discuss the features of the new tax regime and how you can benefit from it.

1. What is the new tax regime for FY 2020-21?

The Budget 2020 introduces a new regime under section 115BAC giving an option to individuals and HUF taxpayers to pay income tax at lower rates. The new system is applicable for income earned from 1 April 2020 (FY 2020-21), which relates to AY 2021-22.

2. What are the tax rates under the new regime?

The tax rates under the new tax regime and the existing tax regime are:

New slab rates		Existing slab rates
Income from Rs 2.5 lakh to Rs 5 lakh	5%	Income from Rs 2.5 lakh to Rs 5 lakh	5%
Income from Rs 5 lakh to Rs 7.5 lakh	10%	Income from Rs 5 lakh to Rs 10 lakh	20%
Income from Rs 7.5 lakh to Rs 10 lakh	15%	Income above Rs 10 lakh	30%
Income from Rs 10 lakh to Rs 12.5 lakh	20%
Income from Rs 12.5 lakh to Rs 15 lakh	25%
Income above Rs 15 lakh	30%

The new tax regime removes the claim for about 70 deductions and exemptions (discussed in para 4). The tax payable under both the latest and the existing regimes without claiming deductions and exemptions is as below:

Annual income	Tax under the existing regime (Rs)	Tax under the new regime (Rs)	Tax savings under the new regime (Rs)
Up to Rs 7,50,000	65,000	39,000	26,000
Up to Rs 10,00,000	117,000	78,000	39,000
Up to Rs 12,50,000	195,000	130,000	65,000
Up to Rs 15,00,000	273,000	195,000	78,000

The new tax regime saves taxes for taxpayers who don’t claim any deductions or exemptions.

3. Exemptions and deductions not claimable under the new tax regime

The following are the deductions and exemptions you cannot claim under the new tax system:

1. The standard deduction, professional tax and entertainment allowance on salaries
2. Leave Travel Allowance (LTA)
3. House Rent Allowance (HRA)
4. Minor child income allowance
5. Helper allowance
6. Children education allowance
7. Other special allowances [Section10(14)]
8. Interest on housing loan on the self-occupied property or vacant property (Section 24)
9. Chapter VI-A deduction (80C,80D, 80E and so on) (Except Section 80CCD(2) and 80JJAA)
10. Without exemption or deduction for any other perquisites or allowances
11. Deduction from family pension income

4. What are the exemptions and deductions available under the new regime?

You can claim tax exemption for:

1. Transport allowances in case of a specially-abled person.
2. Conveyance allowance received to meet the conveyance expenditure incurred as part of the employment.
3. Any compensation received to meet the cost of travel on tour or transfer.
4. Daily allowance received to meet the ordinary regular charges or expenditure you incur on account of absence from his regular place of duty.

5. Can I choose between the new tax regime and the existing regime?

An employee can choose the new tax regime at the beginning of FY 2020-21 and intimate their employer. The employee cannot change their choice anytime during the financial year. However, the change can be done at the time of filing the income tax return in July 2021. The due date for tax filing for the FY 2020-21 (AY 2021-22) is 31 July 2021. In case an employee does not choose the new tax regime at the beginning of the financial year, the employer will deduct tax (TDS) under the existing tax regime. A salaried taxpayer can opt-in and opt-out every year. That means you can choose the new tax regime in one year and choose the regular tax regime in another year. A non-salaried taxpayer has to choose the new regime at the time of filing the tax return. They need not declare or intimate their choice to anyone at any time during the year. However, a non-salaried taxpayer cannot opt-in and opt-out of the new tax regime every year. Once a non-salaried opts out of the new tax regime, they cannot opt-in again for the new tax regime in the future.

6. How do I choose the new regime and plan my tax?

From a tax planning perspective, it is essential to choose the tax regime at the beginning of the financial year. A taxpayer must make a comparison of the income tax under the new tax regime with the existing regime. Once the taxpayer chooses the tax regime at the beginning of the year, the investments and TDS or advance tax payable calculations are made accordingly.

Example 1:

 

Income (Rs)		Old regime (Rs)	New regime (Rs)	Tax Difference (Rs)
Salary	1,250,000
Less: Standard deduction	50,000
Less: Professional tax	2,400
Gross total income	1,197,600
Less: Deduction u/s 80C	150,000
Total income	1,047,600
Income tax		126,780	125,000
Add: Education cess @ 4%		5,071	5,000
Total tax		131,851	130,000	1,851

In the above example, for an income of Rs 12,50,000, the new tax regime is marginally beneficial. However, if you claim further deductions for health insurance, investment in NPS, education loan and so on, the existing regime will be helpful.

Example 2:

 

Income (Rs)		Old regime (Rs)	New regime (Rs)	Tax Difference (Rs)
Salary	1,000,000
Less: Standard deduction	50,000
Less: Professional tax	2,400
Gross total income	947,600
Less: Deduction u/s 80C	150,000
Total income	797,600
Income tax		72,020	75,000
Add: Education cess @ 4%		2,881	3,000
Total tax		74,901	78,000	-3,099

In Example 2, for an income of Rs 10 lakh, the existing tax regime is beneficial. In case an individual claims lower deductions for tax savings, towards health insurance, investment in NPS and so on, the current system will be more beneficial. However, if an individual claims a lower deduction of Rs 1 lakh under section 80C, then the new tax regime will be beneficial. It is important to note that each taxpayer should calculate income tax, taking into account their tax-saving investments and then choose the regime.

7. House property loss under the new tax regime

In case of a self-occupied property, you cannot claim a deduction on interest for a housing loan under the new tax regime. The deduction of Rs 2 lakh allowed in the existing system is not available in the new tax regime. You cannot set-off the loss of Rs 2 lakh from house property from your salary income. If you have let-out a house property, you can claim a deduction for interest paid on the housing loan. Do note that the new tax regime restricts the deduction to the taxable rent received from the property. You cannot set-off the loss arising from the house property due to excess of interest paid over the rental income. Also, you cannot carry forward the loss from house property to future years for set off.

8. Deductions for business expenditure not allowed under the new regime

Deductions and exemptions not allowed for business income:

1. Additional depreciation under section 32.
2. Investment allowance under section 32AD
3. Sector-specific business deductions under section 33AB and 33ABA
4. Expenditure on scientific research under section 35
5. Capital expenditure under section 35AD
6. Exemption under section 10AA for SEZ units

9. Unabsorbed depreciation and business loss under the new regime

In the case of a business income, an individual or HUF cannot claim set-off of the brought forward business loss or unabsorbed depreciation. The deductions not available under the new regime to the extent they relate to deductions/exemptions withdrawn.