Section 115BAC of Income Tax Act 1961: A Comprehensive Guide to Lower Tax Rates and Eligibility Criteria.

March 3, 2023

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Table of Contents

Introduction:

Section 115BAC was introduced by the Finance Act 2020 and came into effect from the Assessment Year 2021-22. It is an optional scheme for taxpayers to choose a lower tax rate regime as compared to the existing tax slabs under the Income Tax Act, 1961. In this blog, we will discuss the provisions of Section 115BAC in detail.

Understanding Section 115BAC:

Section 115BAC provides an option for an individual or Hindu Undivided Family (HUF) to choose a lower tax rate regime as compared to the existing tax slabs under the Income Tax Act, 1961. The scheme provides for concessional tax rates subject to the condition that the taxpayer foregoes certain specified exemptions and deductions.

Tax Rates under Section 115BAC:

Under Section 115BAC, the tax rates are as follows:

For individuals and HUFs who do not avail any exemption or deduction, the tax rate is 5% for income up to Rs. 2.5 lakhs, 10% for income between Rs. 2.5 lakhs and Rs. 5 lakhs, 15% for income between Rs. 5 lakhs and Rs. 7.5 lakhs, 20% for income between Rs. 7.5 lakhs and Rs. 10 lakhs, 25% for income between Rs. 10 lakhs and Rs. 12.5 lakhs, and 30% for income above Rs. 12.5 lakhs.
For individuals and HUFs who avail certain exemptions and deductions, the tax rate is 10% for income up to Rs. 2.5 lakhs, 15% for income between Rs. 2.5 lakhs and Rs. 5 lakhs, 20% for income between Rs. 5 lakhs and Rs. 7.5 lakhs, 25% for income between Rs. 7.5 lakhs and Rs. 10 lakhs, 30% for income between Rs. 10 lakhs and Rs. 12.5 lakhs, and 35% for income above Rs. 12.5 lakhs.

Specified Exemptions and Deductions:

Under Section 115BAC, taxpayers who opt for the lower tax rate regime must forego certain specified exemptions and deductions, which are as follows:

Standard Deduction
Entertainment Allowance
Professional Tax
Leave Travel Allowance (LTA)
House Rent Allowance (HRA)
Chapter VI-A deductions, including Section 80C, Section 80D, Section 80E, Section 80G, and others

It is important to note that the taxpayer has to choose the option of Section 115BAC at the time of filing the income tax return. Once the option is exercised for a particular assessment year, it cannot be changed during the same assessment year.

Benefits of Section 115BAC:

The following are the benefits of opting for the lower tax rate regime under Section 115BAC:

Lower tax liability: Taxpayers who opt for the lower tax rate regime can enjoy lower tax liability, which can help them save money.
Simplified tax structure: The lower tax rate regime under Section 115BAC provides a simplified tax structure, which makes it easier for taxpayers to understand and calculate their tax liability.
No requirement to maintain investment proofs: Taxpayers who opt for the lower tax rate regime do not need to maintain investment proofs or other documents to claim deductions.
Quick tax computation: As the lower tax rate regime does not involve claiming deductions and exemptions, taxpayers can compute their tax liability quickly and easily.
Encourages savings and investments: By foregoiing certain exemptions and deductions, taxpayers may be incentivized to invest in tax-saving instruments like mutual funds, insurance policies, and others.

Drawbacks of Section 115BAC:

The following are some of the drawbacks of opting for the lower tax rate regime under Section 115BAC:

Foregoing deductions and exemptions: Taxpayers who opt for the lower tax rate regime need to forego certain deductions and exemptions, which may result in higher tax liability in some cases.
No option to change during the same assessment year: Once the taxpayer has chosen the lower tax rate regime, they cannot change it during the same assessment year. This may result in a missed opportunity to save on taxes.
Ineligibility for tax rebates: Taxpayers who opt for the lower tax rate regime are not eligible for certain tax rebates like Section 87A rebate, which may result in higher tax liability.

Who can opt for Section 115BAC?

The following are the categories of taxpayers who can opt for the lower tax rate regime under Section 115BAC:

Individuals (resident or non-resident) and HUFs
Those who do not have income from business or profession
Those who do not avail certain exemptions and deductions
Those who have income from salaries, one house property, other sources (excluding income from winnings from lotteries, races, and other similar activities), and agricultural income up to Rs. 5,000

It is important to note that taxpayers who have income from business or profession cannot opt for the lower tax rate regime under Section 115BAC. Additionally, taxpayers who opt for the lower tax rate regime cannot claim certain specified exemptions and deductions.

How to opt for Section 115BAC?

Taxpayers who wish to opt for the lower tax rate regime under Section 115BAC can do so by filling out Form 10-IE while filing their income tax return. The form requires taxpayers to declare that they wish to opt for the lower tax rate regime and that they fulfill the conditions specified under Section 115BAC.

Conclusion:

Section 115BAC provides taxpayers with an option to choose a lower tax rate regime as compared to the existing tax slabs under the Income Tax Act, 1961. However, taxpayers who opt for the lower tax rate regime must forego certain specified exemptions and deductions. It is important to carefully analyze the tax implications before opting for the lower tax rate regime under Section 115BAC.

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Frequently Asked Questions (FAQs)

What is Section 115BAC of the Income Tax Act, 1961?

Section 115BAC is a section of the Income Tax Act, 1961, that provides taxpayers with an option to choose a lower tax rate regime as compared to the existing tax slabs.

2. Who can opt for the lower tax rate regime under Section 115BAC?
Individuals (resident or non-resident) and HUFs who do not have income from business or profession can opt for the lower tax rate regime under Section 115BAC.

3. Can taxpayers who have income from business or profession opt for the lower tax rate regime under Section 115BAC?
No, taxpayers who have income from business or profession cannot opt for the lower tax rate regime under Section 115BAC.

4. What deductions and exemptions do taxpayers need to forego if they opt for the lower tax rate regime under Section 115BAC?
Taxpayers who opt for the lower tax rate regime under Section 115BAC need to forego certain specified exemptions and deductions, such as HRA, LTA, standard deduction, deductions under Section 80C, 80D, etc.

5. Can taxpayers switch between the existing tax slabs and the lower tax rate regime under Section 115BAC?
Taxpayers can switch between the existing tax slabs and the lower tax rate regime under Section 115BAC every financial year.

6. Can taxpayers change their option from the existing tax slabs to the lower tax rate regime or vice versa during the same assessment year?
No, taxpayers cannot change their option from the existing tax slabs to the lower tax rate regime or vice versa during the same assessment year.

7. How can taxpayers opt for the lower tax rate regime under Section 115BAC?
Taxpayers can opt for the lower tax rate regime under Section 115BAC by filling out Form 10-IE while filing their income tax return.

8. Will taxpayers who opt for the lower tax rate regime under Section 115BAC be eligible for tax rebates?
Taxpayers who opt for the lower tax rate regime under Section 115BAC will not be eligible for certain tax rebates, such as the Section 87A rebate.

9. Can taxpayers claim deductions and exemptions under both the existing tax slabs and the lower tax rate regime under Section 115BAC?
No, taxpayers can claim deductions and exemptions under either the existing tax slabs or the lower tax rate regime under Section 115BAC, but not both.

10. Is it mandatory for taxpayers to opt for the lower tax rate regime under Section 115BAC?
No, it is not mandatory for taxpayers to opt for the lower tax rate regime under Section 115BAC. Taxpayers can choose to continue under the existing tax slabs if they prefer.