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The Indian taxation system is often perceived as complex due to a multitude of exemptions, deductions, and fluctuating tax brackets. To address this complexity, the Finance Act of 2020 introduced an optional tax framework under Section 115BAC of the Income Tax Act, 1961. This provision allows taxpayers to choose between the traditional tax structure (commonly known as the old regime) and a new simplified approach featuring lower tax rates. However, opting for the new framework requires forgoing most exemptions and deductions. This article explores the nuances of Section 115BAC, its features, advantages, disadvantages, and practical implications.
Section 115BAC applies to:
Notably, this section does not extend to corporations or partnerships.
The revised framework offers more favorable tax rates than the previous regime, as outlined below:
| Total Income (INR) | Tax Rate (%) |
|---|---|
| Up to 2,50,000 | Nil |
| 2,50,001 to 5,00,000 | 5% |
| 5,00,001 to 7,50,000 | 10% |
| 7,50,001 to 10,00,000 | 15% |
| 10,00,001 to 12,50,000 | 20% |
| 12,50,001 to 15,00,000 | 25% |
| Above 15,00,000 | 30% |
These rates serve as an alternative to the old slab rates, which range from 5% to 30%, though they come with the condition of giving up many deductions and exemptions.
To benefit from the reduced tax rates under Section 115BAC, taxpayers must comply with specific conditions:
Numerous exemptions and deductions under the old regime are not permissible under Section 115BAC, such as:
Additionally, the deduction for interest on housing loans per Section 24(b) (for self-occupied properties) and Leave Travel Allowance (LTA) are no longer available.
Despite these exclusions, some deductions remain:
Salaried individuals can alternate between the old and new frameworks each fiscal year during the income tax return filing process. If they select the new framework for Tax Deducted at Source (TDS) through their employer, they still retain the option to revert to the old framework when filing their returns.
For business owners and professionals, the choice is more restrictive. Once they opt for Section 115BAC, reverting to the old framework is not permitted unless they stop earning income from their business or profession.
Employers should facilitate employees’ choice of tax regime for TDS calculations, while allowing different choices during the annual tax return process.
Tax professionals must inform clients of the implications of both tax regimes and provide guidance to align their choices with their financial situations.
The introduction of a dual tax structure poses administrative challenges, requiring careful monitoring to prevent misuse of provided flexibility.
Section 115BAC significantly transforms the Indian taxation landscape by offering a simplified, lower-rate tax option. While it provides notable advantages for taxpayers with few deductions, its suitability depends on individual financial profiles. Taxpayers are advised to conduct a thorough comparative analysis each year to select the tax regime that minimizes their liabilities. For the government, this dual-system approach aims to balance simplicity with adaptability to cater to diverse taxpayer needs. As the Indian economy evolves, Section 115BAC represents an effort to achieve tax simplification while maintaining fiscal responsibility. Taxpayers and their advisors should stay informed to maximize the benefits under this provision.