Section 115BAC on Income Tax Act - New Tax rate for Individuals and HUF

A new section 115BAC is introduced by Union Budget 2020 to provide for new income tax rates on income slab of an Individual and HUF having a business income or no business income including a salaried person. Section 115BAC has removed all the deduction and exemption available under section 10(13A), Standard Deduction under section 16, and 80C, etc. This section 115BAC prescribes new tax rates for Individuals and HUF.

Union Budget 2020 has introduced a new section 115BAC to amend the Income Tax Act, 1961. It provides for lower income tax rates for Individuals and HUF without claiming any deduction or exemption.

For this purpose, clause 53 of the Finance Bill, 2020 has proposed to insert a new section 115BAC to the Income Tax Act, 1961.

Clause 53 of the Finance Bill, 2020 reads as follows-

Tax on income of individuals and Hindu undivided family.

53. After section 115BAB of the Income-tax Act, the following sections shall be inserted with effect from the 1st day of April, 2021, namely:––

'115BAC. (1) Notwithstanding anything contained in this Act but subject to the provisions of this Chapter, the income-tax payable in respect of the total income of a person, being an individual or a Hindu undivided family, for any previous year relevant to the assessment year beginning on or after the 1st day of April, 2021, shall, at the option of such person, be computed at the rate of tax given in the following Table, if the conditions contained in sub-section (2) are satisfied, namely:—

Sl. No.	Total income	Rate of tax
(1)	(2)	(3)
1.	Upto Rs 2,50,000	Nil
2.	From Rs 2,50,001 to Rs 5,00,000	5 percent
3.	From Rs 5,00,001 to Rs 7,50,000	10 percent
4.	From Rs 7,50,001 to Rs 10,00,000	15 percent
5.	From Rs 10,00,001 to Rs 12,50,000	20 percent
6.	From Rs 12,50,001 to Rs 15,00,000	25 percent
7.	Above Rs 15,00,000	30 percent

Provided that where the person fails to satisfy the conditions contained in sub-section (2) in any previous year, the option shall become invalid in respect of the assessment year relevant to that previous year and other provisions of this Act shall apply, as if the option had not been exercised for the assessment year relevant to that previous year:

Provided further that where the option is exercised under clause (i) of sub-section (5), in the event of failure to satisfy the conditions contained in sub-section (2), it shall become invalid for subsequent assessment years also and other provisions of this Act shall apply for those years accordingly.

(2) For the purposes of sub-section (1), the total income of the individual or Hindu undivided family shall be computed,—

(i) without any exemption or deduction under the provisions of clause (5) or clause (13A) or prescribed under clause (14) (other than those as may be prescribed for this purpose) or clause (17) or clause (32), of section 10 or section 10AA or section 16 or clause (b) of section 24 (in respect of the property referred to in sub-section (2) of section 23) or clause (iia) of sub-section (1) of section 32 or section 32AD or section 33AB or section 33ABA or sub-clause (ii) or sub-clause (iia) or sub-clause (iii), of sub-section (1) or sub-section (2AA), of section 35 or section 35AD or section 35CCC or clause (iia) of section 57 or under any of the provisions of Chapter VI-A other than the provisions of sub-section (2) of section 80CCD or section 80JJAA;

(ii) without set off of any loss,—

(a) carried forward or depreciation from any earlier assessment year, if such loss or depreciation is attributable to any of the deductions referred to in clause (i);

(b) under the head “Income from house property” with any other head of income;

(iii) by claiming the depreciation, if any, under any provision of section 32, except clause

(iia) of sub-section (1) of the said section, determined in such manner as may be prescribed; and

(iv) without any exemption or deduction for allowances or perquisite, by whatever name called, provided under any other law for the time being in force.

(3) The loss and depreciation referred to in clause (ii) of sub-section (2) shall be deemed to have been given full effect to and no further deduction for such loss or depreciation shall be allowed for any subsequent year:

Provided that where there is a depreciation allowance in respect of a block of assets which has not been given full effect to prior to the assessment year beginning on the 1st day of April, 2021, corresponding adjustment shall be made to the written down value of such block of assets as on the 1st day of April, 2020 in the prescribed manner, if the option under sub-section (5) is exercised for a previous year relevant to the assessment year beginning on the 1st day of April, 2021.

(4) In case of a person, having a Unit in the International Financial Services Centre, as referred to in sub-section (1A) of section 80LA, which has exercised option under sub-section (5), the conditions contained in sub-section (2) shall be modified to the extent that the deduction under section 80LA shall be available to such Unit subject to fulfillment of the conditions contained in the said section.

Explanation.—For the purposes of this sub-section, the term "Unit" shall have the meaning assigned to it in clause (zc) of section 2 of the Special Economic Zones Act, 2005.

(5) Nothing contained in this section shall apply unless option is exercised in the prescribed manner by the person,—

(i) having business income, on or before the due date specified under sub-section (1) of section 139 for furnishing the returns of income for any previous year relevant to the assessment year commencing on or after the 1st day of April, 2021, and such option once exercised shall apply to subsequent assessment years;

(ii) having no business income, alongwith the return of income to be furnished under sub-section (1) of section 139 for a previous year relevant to the assessment year:

Provided that the option under clause (i), once exercised for any previous year can be withdrawn only once for a previous year other than the year in which it was exercised and thereafter, the person shall never be eligible to exercise option under this section, except where such person ceases to have any business income in which case, option under clause (ii) shall be available.

Analysis of section 115BAC

Clause 53 of the Bill seeks to insert new sections 115BAC in the Income-tax Act relating to tax on the income of individuals and Hindu undivided family.

The highlights of section 115BAC are listed below-

1. Optional Scheme: The scheme of taxation prescribed in section 115BAC is optional. It means an individual or a HUF may or may not opt for this scheme and continue the old regime of taxation.

2. Applicability: Section 115BAC is applicable only to an individual or a HUF. This section will come into effect from the assessment year (AY) 2021-22.

The individual taxpayer may be a resident or non-resident, senior citizen or a very senior citizen, a male assessee or a female taxpayer.

3. No separate basic exemption limit: The tax shall be levied on total income as per the table given in the section itself. The analysis of the tax rate table reveals that the basic exemption limit is Rs. 2,50,000 across the board. Even for a senior citizen or a very senior citizen, the tax exemption slab is limited to Rs. 2,50,000 only.

4. No slab basis of the rate of tax: There is no slab basis for the income tax rate. The table prescribes a flat rate of income tax on the total income of an individual or a HUF. For example, if the total income is Rs. 6,00,000, the income-tax rate falls at 10 percent and the tax amount comes to Rs. 60,000. In addition to this, surcharge on income-tax is applicable to the prescribed tax rates.

(Note: There appears to be a drafting error in the provision which needs rectification for computing tax on a slab rate basis.)

The Surcharge on income tax for an Individual or a HUF for AY 2021-22 is given below-

Sl	Quantum of Total Income	Rate of Surcharge
(a)	Where the total income (including the income under the provisions of section 111A and section 112A ) exceeds Rs. 50 Lakh but does not exceed Rs. 1.0 Crore	10%
(b)	Where the total income (including the income under the provisions of section 111A and section 112A) exceeds Rs. 1.0 Crore but does not exceed Rs. 2.0 Crore	15 %
(c)	Where the total income (excluding the income under the provisions of section 111A and section 112A) exceeds Rs. 2.0 Crore but does not exceed Rs. 5.0 Crore	25 %
(d)	Where the total income (excluding the income under the provisions of section 111A and section 112A) exceeds Rs. 5.0 Crore	37%
(e)	Where the total income (including the income under the provisions of section 111A and section 112A) exceeds Rs. 2.0 Crore, but is not covered under clauses (c) and (d)	15%

3. Conditions: To claim the reduced tax rate, one needs to fulfill the conditions specified in section 115BAC(2).

Sub-section (2) provides that the concessional rate of tax shall be applicable only if the 'total income' of the individual or HUF shall be computed as stated below-

(i) The total income is computed without any exemption or deduction under the following sections-

Section	Particulars
Section 10(5)	Exemption for Leave Travel Allowance
Section 10(13A)	Exemption for House Rent allowance
Section 10(14)	Exemption from any other allowance
Section 10(17)	Exemption from allowance to MPs or MLAs
Section 10(32)	Exemption of Rs. 1,500 in case of clubbing of minor child income
Section 10AA	Exemption for newly established Units in Special Economic Zones
Section 16	Standard Deduction of Rs. 50,000; Entertainment Allowance of Rs. 5,000 and Professional Tax
Section 24(b)	Interest paid on on home loan
Section 32(1)(iia)	Additional Depreciation
Section 32AD	Deduction for Investment in new plant or machinery in notified backward areas in certain States.
Section 33AB	Deduction for deposit into Tea development account, coffee development account and rubber development account
Section 33ABA	Deposit into Site Restoration fund
Section 35(2AA)	Deduction for expenditure on scientific research
Section 35(1)(ii)	Deduction for expenditure on scientific research
Section 35(1)(iia)	Deduction for expenditure on scientific research
Section 35(1)(iii)	Deduction for expenditure on scientific research
Section 35AD	Deduction in respect of expenditure on specified business
Section 35CCC	Deduction for expenditure on agricultural extension project
Section 57(iia)	Deduction from family pension income , equal to 33 1/3 per cent of such income or Rs. 15,000, whichever is less.
Deduction under Chapter VI-A Except section 80CCD(2) and section 80JJA	Section 80C, Section 80D, Section 80CCD(1B), Section 80G, etc.

(ii) The total income is computed without set-off of any brought forward business loss or unabsorbed depreciation to the extent it is related to any of the deductions referred above.

(iii) The total income is computed without set-off of any loss under the head “Income from house property” with any other head of income.

A point is required to be noted that interest on home loan under section 24(b) is not allowed under section 115BAC(2)(i). It appears that loss arising from let-out house property is allowed. It is wrong. The same is restricted under section 115BAC(2)(ii)(b).

However, in case of an actually let-out or deemed to be let-out house property, the deduction for property tax payment, standard deduction under section 24(a) and interest payable on capital borrowed for acquisition and construction of house property will be available. In the case of a let-out house property, the full interest amount on the borrowed capital can be claimed as a deduction from rental income. In case of interest amount exceeds the net annual value, the set-off of such loss is allowed in the current year. Further, such a loss cannot be carried forward.

(iv) In the case of business income, the total income should be computed with reference to normal depreciation u/s 32 and excluding the additional depreciation u/s 32(1)(iia).

(v) In case of salary income, the total income should be computed without any exemption or deduction for allowances or perquisite, by whatever name called, provided under any other law for the time being in force.

(vi) Sub-section (3) states that any business loss and unabsorbed additional depreciation shall be deemed to have been given full effect to and no further deduction for such loss or depreciation shall be allowed for any subsequent year.

Hence, if in any future assessment year, one opts-out of the new scheme of taxation then such loss or depreciation not claimed in an earlier year(s) cannot be claimed in the succeeding year when the existing tax scheme is re-opted.

(vii) Further, the additional depreciation which was not allowed in the new scheme, adjustments in the block of assets shall be required to be made.

4. Exercising the option: To exercise the option under this section, one has to inform the same to the income tax department. This can be done on or before the prescribed time limit and is based on individual or HUF's composition of income as detailed below-

(a) In case of an Individual or HUF having no business income (for example, a salaried individual), the option needs to be exercised at the time of filing of return of income (ITR) along with the ITR. This needs to be done every year.

Hence, a salaried or other individual (or HUF) having no business income has to exercise this option every year if he opts to pay tax under the new scheme.

Moreover, one may exit from the option in any year without exercising the option for that year and may re-enter into the scheme, if he wishes to opt the option in a later year.

The only condition is that return must be filed in time within the due date of filing of return u/s 139(1). In case belated return is filed, then the option cannot be exercised.

(b) In case of an Individual or HUF having a business income, on or before the due date specified under sub-section (1) of section 139 for furnishing the returns of income for any previous year relevant to the assessment year 2021-22 and such option once exercised shall apply to subsequent assessment years.

The option, once exercised, can be withdrawn only once and once withdrawn he shall never be eligible to exercise option under this section in any future assessment year if he is continuing with business income. In case he has no business income, then he will fall under the aforesaid case of a person having no business income.

Conclusion

In her Budget Speech, the Finance Minister Nirmala Sitaraman told that currently the Income Tax Act was riddled with various exemptions and deductions which made compliance by the taxpayer and administration of the Income Tax Act by the tax authorities a burdensome process. It was almost impossible for a taxpayer to comply with the Income-tax law without taking help from professionals.

Hence, in order to provide significant relief to the individual taxpayers and to simplify the Income-tax law, she proposed to bring a new and simplified personal income tax regime wherein income tax rates will be significantly reduced for the individual taxpayers who forgo certain deductions and exemptions.

Whether the new tax regime will be beneficial to an individual taxpayer or not is not a matter of concern at all. This is due to the fact that after removing all the exemption and deduction, the liability to pay the tax will always be higher in the new regime compared to the existing regime and no would like to pay higher tax only by foregoing the exemption and deduction.

Even after paying any fees to a professional, an individual will find the existing scheme will be more beneficial than the new scheme introduced by section 115BAC.

Practically, section 115BAC is more theoretical rather than practical and only survive on the discussion table only. It should be noted that the wordings used as a concessional rate of tax or a lower rate of tax or beneficial tax rate for the tax rate specified in the aforesaid table are only related to 'rate of tax' and not the amount of tax. Hence, the rate of tax may be a lower rate or a concessional rate or a beneficial rate but the amount of tax may not be lower or beneficial.

For example, if the total income is Rs. 6,00,000 then in the existing slab based scheme, the tax rate is 20 percent and the tax amount is Rs. 32,500. In the new scheme, the tax rate is 10 percent but the tax liability is Rs. 60,000. So the tax rate is reduced from 20 percent to 10 percent and hence the tax rate is beneficial. But the tax amount has gone up from Rs. 32,500 to Rs. 60,000 and hence the tax liability is adversarial.

Total income	Existing Scheme		New Scheme u/s 115BAC
	Rate of Tax	Tax Amount	Rate of Tax	Tax Amount
Total Income is Rs. 6,00,000	20%	Rs. 32,500	10%	Rs. 60,000