115BAC of the Income Tax Act (Essential Information)

The Finance Act of 2020 adds a new Section 115BAC of the Income Tax Act. It allows you to choose between the old and new tax regimes without considering the legal requirements for exemptions or deductions.

However, there is no clarity in this new Section 115BAC on whether an employer can review the new tax regime while withholding taxes from salary. The Central Board of Direct Taxes (CBDT) vide Circular No.C1 of 2020 issued a clarification to address such queries. Your employer, concerning your intimation, should compute the tax deduction at source (TDS) by considering the provision of Section 115 BAC, as applicable.

What Is 115BAC of the Income Tax Act?

The Finance Minister of India inserted a new section 115BAC into the Income Tax Act,1961, during Budget 2020. It was effective from FY 2020-21. Section 115BAC deals with a new and optional income tax regime.

The new system is eligible for your income from 1st April 2020 (FY 2020-21). It relates to AY 2021-22.

A key feature of the new regime is that there has been a considerable drop in the income tax slab rates. However, these new rates come at the expense of vital deductions and exemptions currently available under the existing or old regime.

Section 115 BAC of the Income Tax Act gives the option to choose between old and new tax regimes. New tax slabs have many advantages over the previous one, so you might wish to use this section and pay tax according to the new tax regime. However, you can select this section only if your total income for the financial year satisfies the below conditions:

1. The income you declare should not cover any of the business income.
2. You should calculate your income without any deductions or exemptions given under the following:
3. Chapter VI-A except those beneath section 80CCD/ 80JJAA
4. Section 24b
5. Clause (5)/(13A)/(14)/(17)/(32) of Section 10/10AA/16
6. Section 32(1)/ 32AD/ 33AB/ 33ABA
7. Section 35/ 35AD/ 35CCC
8. Clause (iia) of Section 57
9. Calculate your income without considering losses from past AYs. These losses may be from deductions or real estate owned by the homeowner.
10. Calculate your income without making any exemptions or deductions for any perks or allowances.
11. Complete the calculation without claiming depreciation under clause (iia) of Section 32.

If you file your returns based on these conditions, you can use section 115 BAC and choose a new tax regime for saving your taxes.

Which Deduction Is Allowed under 115BAC?

Most of the income tax deductions will not come under the new tax regime. But few are allowed under section 115 BAC of the Income Tax Act. They are

1. Deduction under section 80CCD(2) (employer’s contribution to one’s pension account)
2. Any allowance for the cost of tour or travel or transfer
3. Conveyance allowance for performance of office duties
4. Deduction under section 80JJAA (additional employee cost)
5. Daily allowance contributed to employees under specific cases
6. Transport allowance for differently-abled employees (Divyang)

Which Deductions Are Not Applicable under Section 115BAC?

There are several exemptions and deductions under section 115 BAC from the old regime. The following are the major exemptions that get suspended under the new regime 

1. Major deductions under Chapter VIA (under section 80C, 80CCC, 80CCD, 80DD, 80DDB, 80E, 80EE, 80EEA, 80G, 80IA, etc.)
2. Leave Travel Allowance under section 10(5)
3. House Rent Allowance (HRA) under section 10(13A)
4. Allowances under section 10(14)
5. Deduction for Entertainment Allowance and Employment/Professional Tax under section 16
6. Depreciation under section 32(iia)
7. Deduction for Expenses or Offering on Scientific Research
8. Home loan interest under section 24(b)
9. Deductions under section 32AD, 33AB, 33ABA, 35AD, 35CCC
10. Deduction from Family Pension under section 57(iia)
11. Standard deduction

Be aware that the new regime is optional in FY 2020-21. Hence, you can choose between the new or old regime, including all the aforementioned deductions.

How Do I File 115BAC?

The Finance Ministry introduced a ‘New Tax Regime’. Under Section 115 BAC, you can choose between the old and new tax regimes. However, to file ITR, under this section you should provide Form 10IE.

Form 10IE is a declaration by you for choosing the ‘New Tax Regime’. The details required to file in Form 10 IE are

1. Your Name
2. Confirm your income under ‘Profit or gains from business and profession.
3. PAN number
4. Address
5. Date of birth/date of incorporation
6. Nature of business/profession
7. Confirmation in ‘yes/no’ of whether you have any unit in IFSC (International Financial Service Centre) as mentioned in sub-section (1A) of section 80LA. Suppose the answer is ‘Yes’, then you need to provide details of the unit.
8. Details of Form 10 IE previously filed.
9. Declaration

Communicate with the Income Tax Department by declaring Form 10 IE that you choose to pay your tax through the new tax regime.

Is 115BAC Applicable after the Due Date?

No, you cannot file ITR under section 115 BAC after the due date. If you wish to choose a new tax regime, you should declare Form 10IE and file your returns before the due date (i.e., July 31).  

In the case of revised returns, you cannot change your tax regime and follow only your previous tax regime for filing returns.

What Is the Difference between the Old and New Tax Regime under Section 115 BAC?

The old tax regime provides different income tax exemptions and deductions. Hence it might be suitable for most people. This regime might be better suited to you if you make adequate investments in various tax-saving schemes.

If you fail to invest in tax-saving schemes, you might feel the new tax regime is beneficial. These schemes include Life Insurance, Equity Linked Savings Scheme (ELSS), National Pension Scheme (NPS), National Savings Certificate (NSC), Employee Provident Fund (EPF), tax-saving Fixed Deposit (FD), etc.

Furthermore, the new regime does not include standard deductions amounting to ₹50000.

With all these, you should note that there is no set formula for deciding between these two regimes. Calculate the total tax outgo according to the old and new slab rates before deciding which one should go.

Bottomline

Section 115 BAC of the Income Tax Act allows you to choose between the old and new tax regimes without considering the legal requirements for exemptions or deductions. You shall declare Form 10IE and file your returns under your required tax regime using section 115 BAC.

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