Section 115BAC of the Income Tax Act

The Income Tax Act of 1961 is the law that dictates the direct taxation system of India. Over the years, the act has been modified and updated multiple times to simplify tax compliance and to bring various incomes into the direct taxation ambit. One of the few major changes to the act is the introduction of section 115BAC, which is a simplified tax regime. 

In this comprehensive guide, we will focus on section 115BAC of the Income Tax Act, who can opt for it, the tax rates under this new regime, and the various deductions that can be claimed.  

What is Section 115BAC of the Income Tax Act?

Introduced in the Union Budget 2020, section 115BAC of the Income Tax Act, 1961 is a new tax regime. Taxpayers who opt for this regime get concessional tax rates at the expense of foregoing specific exemptions and deductions.

At the time of introduction, section 115BAC was an optional tax regime that taxpayers could manually opt for. However, from the Financial Year 2023-24 onward, it has become the default tax regime for all taxpayers. Taxpayers can still opt out of the new regime and choose the old regime if they feel that it is more beneficial to them.   

Who Can Opt for Section 115BAC of the Income Tax Act?

Section 115BAC of the Income Tax Act clearly states that the following categories of taxpayers are eligible to opt for the new tax regime. 

• Resident individual taxpayers
• Non-resident individual taxpayers
• Hindu Undivided Families (HUFs)
• Association of Persons (AOPs)
• Body of Individuals (BOIs) 
• Artificial Juridical Persons (AJPs) 

All other categories of taxpayers such as companies and co-operative societies cannot opt for section 115BAC. 

Tax Rates Under Section 115BAC of the Income Tax Act

As you have already seen, the 115BAC new tax regime enables eligible assessees to pay tax at reduced rates. Here is a quick overview of the income slabs and their respective tax rates under section 115BAC for the financial year 2024 – 2025.

The income tax rates under section 115BAC of the Income Tax Act are more favourable compared to the old regime, especially for individuals in the middle-income brackets. However, it is important to note that taxpayers who opt for this regime get very limited deductions and exemptions.

Exemptions and Deductions Unavailable Under Section 115BAC of the Income Tax Act

The new tax regime disallows taxpayers from claiming the following list of exemptions and deductions to reduce their overall tax liability.

• House rent allowance (HRA) and leave travel allowance (LTA)
• Professional tax 
• The following list of allowances: 

• • Allowance to Member of Parliament (MP) or Member of Legislative Assembly (MLA)
  • Entertainment allowance
  • Minor child income allowance
  • Children education allowance
  • Helper allowance
  • Food allowance
  • Other special allowances under section 10(14) 
  • Any other perquisites or allowances
• Deductions under sections 10 (including clauses 5, 13A, 14, 17, 32), 10AA, and 16
• Interest on housing loan on self-occupied property under section 24
• Additional depreciation under section 32(1)(iia) 
• Deductions under sections 32(1), 32AD, 33AB, 33ABA 
• Deductions under sections 35, 35AD, and 35CCC
• Deductions under Chapter VI A of the Income Tax Act (sections 80C, 80D, 80E, and 80U, among others)  
• Interest on Electric vehicle loan under section 80EEB 
• Contributions to National Pension System (NPS) accounts
• Deduction on bank interest income under sections 80TTA and 80TTB
• Donations made to political parties or trusts under section 80G

Exemptions and Deductions Allowed Under Section 115BAC of the Income Tax Act

While Section 115BAC of the Income Tax Act restricts many popular deductions, certain exemptions and deductions remain available. Here is a quick overview of what can be claimed by the taxpayer to reduce their liability. 

• The following list of allowances:

• • Transport allowance by a specially-abled person 
  • Conveyance allowance
  • Compensation for meeting the cost of travel while on tour or transfer
  • Daily allowance for meeting the expenses incurred while being absent from the regular place of duty
  • Perquisites provided for official purposes
• Exemption on voluntary retirement under section 10(10C)
• Exemption on gratuity under section 10(10) 
• Leave encashment under section 10(10AA)
• Interest on housing loan on let-out property under section 24
• Gifts amounting to ₹50,000
• Standard deduction of up to ₹75,000 (for financial year 2024 – 2025) 
• Deduction on employer’s contribution to NPS account under section 80CCD(2)
• Deduction on additional employee cost under section 80JJA
• Deduction of up to ₹25,000 or 1/3rd of family pension under section 57(iia)  
• Deduction of the amount deposited in the Agniveer Corpus Fund under section 80CCH(2)

Conclusion

The introduction of Section 115BAC of the Income Tax Act brought in a significant reform in India’s taxation system. The simplified tax structure with reduced rates can help taxpayers reduce their tax liability significantly. 

However, the new tax regime may offer many benefits to those relying on exemptions and deductions to reduce their tax liability. Therefore, when choosing between the two regimes, taxpayers must focus on factors like their individual circumstances, income levels, and investment patterns. Furthermore, it is advisable to carefully calculate tax liability under both regimes before making a decision.