May 18, 2024

Section 115BAC: Understanding the New Tax Regime and Its Impact on Individual Taxpayers

In a constant effort to simplify the Indian tax system and provide relief to individual taxpayers, the government introduced Section 115BAC in the Union Budget for the financial year 2020-21.

This section brought forth a new tax regime with the aim of reducing the tax burden on individuals while also offering a simplified structure. Let’s explore Section 115BAC in detail, understand its provisions, and assess the impact it has on individual taxpayers in India.

An Overview of Section 115BAC:

Section 115BAC, introduced in the Income Tax Act, 1961, presents taxpayers with an alternative tax regime to the existing one under Section 115BAA. It allows individuals and Hindu Undivided Families (HUFs) the option to choose between the existing tax regime with deductions and exemptions or the new, simplified tax regime with lucrative tax rates.

Key Features of Section 115BAC

  • Revised Tax Slabs: The new tax regime under Section 115BAC offers lucrative income tax rates compared to the existing regime. These new rates are designed to reduce the tax burden on individual taxpayers.
  • Exemption and Deduction Opt-Out: Opting for this regime means foregoing most exemptions and deductions available under the existing regime. This includes deductions for HRA, 80C, 80D, and others.
  • New Tax Slabs: The tax rates under Section 115BAC are structured into three categories based on age. Taxpayers can choose the regime that best suits their age and financial circumstances.

Understanding the New Tax Slabs

The new tax regime under Section 115BAC introduces significant changes in the tax slabs, with the primary objective of providing relief to taxpayers. Here are the tax slabs for individual taxpayers and HUFs for the financial year 2021-22 (assessment year 2022-23):

  • Income up to ₹2.5 lakh: Nil (No change from the existing regime)
  • Income between ₹2.5 lakh and ₹5 lakh: 5% (No change from the existing regime)
  • Income between ₹5 lakh and ₹7.5 lakh: 10%
  • Income between ₹7.5 lakh and ₹10 lakh: 15%
  • Income between ₹10 lakh and ₹12.5 lakh: 20%
  • Income above ₹12.5 lakh: 25%

Revised Income Tax Slabs for the New Tax Regime FY 2023–24

  • Income up to ₹3lakh: 0%
  • Income up to ₹3 lakh to ₹ 6 lakh: 5%
  • Income up to ₹6 lakh to ₹9 lakh: 10%
  • Income up to ₹9 lakh to ₹12 lakh: 15%
  • Income up to ₹12 lakh to ₹15 lakh: 20%
  • Income up above ₹ 15 lakh: 30%

Impact on Individual Taxpayers

The introduction of Section 115BAC has brought about several changes in the taxation landscape for individual taxpayers in India. Let’s examine the impact of this new tax regime:

  • Reduced Tax Burden: The new tax slabs offer reduced tax rates, providing relief to taxpayers across age groups. This can result in higher disposable income for individuals.
  • Simplified Structure: Section 115BAC simplifies the tax calculation process by eliminating the need for taxpayers to claim multiple exemptions and deductions. This can reduce the complexity of tax planning and filing.
  • Age-Based Flexibility: The new regime allows taxpayers to choose the tax slab that aligns with their age and financial circumstances. Senior citizens and super senior citizens benefit from higher exemption limits.
  • Loss of Exemptions: However, it’s important to note that choosing the new regime means forgoing most exemptions and deductions, including those for housing loan interest, medical insurance, and contributions to provident funds.
  • Consideration of Individual Factors: The decision to opt for Section 115BAC should be based on individual factors such as age, income level, and the availability of exemptions and deductions that may be foregone.
  • Tax Planning: Taxpayers should carefully assess their financial situation and perform tax planning to determine which regime, the existing one or Section 115BAC, is more advantageous for them.
  • Section 87A Benefit: In addition to the relief provided by Section 115BAC, taxpayers can also benefit from Section 87A, where an individual whose total income does not exceed Rs. 5,00,000 is entitled to claim rebate.

Conclusion

Section 115BAC introduces a new tax regime in India aimed at simplifying tax structures and reducing the tax burden on individual taxpayers. While it offers lucrative tax rates, it also requires taxpayers to forego most exemptions and deductions available under the existing regime. Therefore, the choice between the two regimes should be made after careful consideration of individual financial circumstances and goals.

Ultimately, the impact of Section 115BAC on individual taxpayers varies based on factors such as age, income level, and the importance of exemptions and deductions in one’s financial planning.

Previous post Understanding the Power of SMSF – Self-Managed Superannuation Funds
Next post Life Insurance: Understanding the Basics