Introduction:

The 2020 Budget proposes a new system that allows individuals and Hindu Undivided Family taxpayers to pay taxes at reduced rates under Section 115BAC of the Income Tax Act. The new approach applies to income received from April 1st 2020 onwards (Financial Year 2020-21).

New Regime Tax Rates

The tax levels under the existing and new tax regimes are as follows:

New Tax Regime

Income Level

Rate of Tax

<2,50,000 INR

Nil

2,50,000 INR – 5,00,000 INR

5% of the overall income

5,00,000 INR – 7,50,000 INR

10% of the overall income

7,50,000 INR – 10,00,000 INR

15% of the overall income

10,00,000 INR – 12,50,000 INR

20% of the overall income

12,50,000 INR – 15,00,000 INR

25% of the overall income

>15,00,000 INR

30% of the overall income

Existing Tax Regime

Income Level

Rate of Tax

<2,50,000 INR

Nil

2,50,000 INR – 5,00,000 INR

5% of the overall income

5,00,000 INR – 10,00,000 INR

20% of the overall income

>10,00,000 INR

30% of the overall income

Without seeking deductions and exclusions, the tax due under the new and old tax systems is as follows:

Yearly Income

Tax Due under New Tax Regime

Tax Due under Existing Tax Regime

Tax Savings

Up to 7,50,000 INR

39,000 INR

65,000 INR

26,000 INR

Up to 10,00,000 INR

78,000 INR

1,17,000 INR

39,000 INR

Up to 12,50,000 INR

1,30,000 INR

1,95,000 INR

65,000 INR

Up to 15,00,000 INR

1,95,000 INR

2,73,000 INR

78,000 INR

According to the table above, the new taxation system under Section 115BAC of the Income Tax Act typically saves money for taxpayers not seeking any exemptions or deductions.

Which deductions and exemptions cannot be claimed under Section 115BAC New Tax Regime?

Tax exemptions and deductions that a taxpayer cannot seek under this new tax system under Section 115BAc of the Income Tax Act are as follows:

  • On salary, the usual tax deduction under the professional tax, Section 80TTA, Section 80TTB, as well as entertainment allowance.
  • Leave Travel Allowance (LTA).
  • Allowance for House Rent (HRA).
  • Income support for minor children.
  • Helper Allowance.
  • Education allowance for children.
  • Any special consideration as defined under Income Tax Act Section 10(14).
  • Home loan interest for any unoccupied or self-occupied property under Income Tax Act Section 24.
  • Except for Section 80CCD(2) and 80JJAA, Chapter VI-A deductions including Section 80C, Section 80D, Section 80E, and others.
  • Deduction or exemption for any additional benefits or allowances.
  • Deduction from family pension income.

Tax deductions for company income that are no longer permitted under the new tax regime under Section 115BAc of the Income Tax Act.

The following tax breaks from business revenue are not permitted:

  • Further depreciation under Section 32.
  • Section 32AD Investment Allowance
  • Sections 33AB and 33ABA provided industry-specific company deductions.
  • Section 35 expenditures for scientific research
  • Section 35AD provided Capital Expenditure
  • Section 10AA exemption for SEZ units

Which deductions and exemptions can be claimed under Section 115BAC New Tax Regime?

Under the New Tax Regime, you can get a tax break for

  • Transportation Allowances for Disabled individuals.
  • Conveyance allowance received to cover expenses of transportation which is paid as a component of the work.
  • Any remuneration paid to cover transfer or tour expenses.
  • Daily stipend paid to cover routine normal charges or expenses incurred as a result of his usual duty absence.
  • Employer contribution to an NPS account under Section 80CCD(2) of the Income Tax Act.
  • Deduction for extra employee expenses under Section 80JJA.

Is it possible to pick between the new and existing tax regimes?

A salaried assessee can pick this new tax system at the beginning of the 2020-21 fiscal year and notify their employer. During the fiscal year, the individual cannot alter their decision. They can, however, alter their mind when completing their income tax returns. If an individual does not select the new taxation regime at the beginning of the fiscal year, the company will deduct regular TDS under the old tax system. As a result, a salaried assessee has the option to opt-in and out each year. That is, you can pick the new tax system one year and the existing tax regime the next.

When submitting tax returns, a non-salaried assessee must select the new regime. During the year, they are not required to announce or inform anybody of their decision. A non-salaried assessee (one who earns a living through a company or profession) cannot choose their tax regimes every year. If a non-salaried person selects to drop the new tax system, they cannot re-enrol in the new tax system in the following years.

How can I decide on a new regime and arrange my taxes?

Picking a taxation system at the start of the fiscal year is critical for tax preparation. An assessee must evaluate the tax rate under the new and old tax regimes. When a taxpayer selects a tax system at the start of the financial year, his/her investments, as well as TDS, are calculated appropriately. Also, if a taxpayer plans to use this new tax system, he or she needs to submit the Form 10IE document to the Department of Income Tax before completing the return.

However, if you choose the new tax system, you must forego a number of tax exemptions and deductions that were previously accessible. Salaried individuals can make use of important advantages such as standard professional tax deduction, House Rent Allowance, Leave Travel Assistance, and some of the deductions and allowances granted for completing responsibilities under the Section 115BAC new tax regime. Numerous deductions such as those accessible under Income Tax Act Section 80C (comprising of various items such as Employees’ Provident Fund, Life insurance premium, School fees, Public provident fund, National savings certificate, Equity-linked saving scheme, home loan repayment, and so on.), Section 80D (for medical insurance premiums), Section 80 CCD(1) & Section 80 CCD(1B) (for National pension system) will also be unavailable to both salaried as well as self-employed taxpayers.

You also lose your claim for self-occupied house loan interest, as well as the ability to carry forward or set off a loss on rented property. Under the new method, you would also be unable to offset any carried forward losses on current income. Similarly, retired senior citizens cannot claim a standard deduction for pensions earned in connection with previous employment. Senior citizens would no longer be allowed to deduct up to 50,000 INR in interest from post offices and banks under Section 80TTB.

Thus, deciding on a tax regime for a fiscal year is a significant task that necessitates an understanding of one’s income and potential deductions in order to make an educated decision and plan taxes ahead of time.

Conclusion

When all is said and done, the decision to choose a particular tax regime depends on the facts and circumstances of each individual’s personal finances, as well as upon one’s priorities. It’s your responsibility to arrange your fiscal affairs in the most favourable way possible. And that’s why it’s so important for you to understand the tax laws as well as your income situation so that you know what you can earn in the coming year, how much money you will have to pay in taxes, and which deductions and credits you may be able to claim. The new tax regime under Section 115BAc of the Income Tax Act opens up possibilities of tax savings by lowering the base tax rate but removing tax breaks available. So, choose wisely!


FAQ’s

Because several exemptions and deductions can be claimed, and the balance of these tax advantages varies greatly from one person to the next, a prepared comparison calculation table cannot be provided to show which tax regime is most advantageous.


The drawbacks of the new tax regime include:

  • Tax breaks non-availability
  • Reduced flexibility of business income 

Yes. Individuals with salaried income select between the new tax regime and the existing tax regime at the start of every financial year.