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Section: 115BAC – Incentives in Tax rates to Individual and HUF (Proposed)

In the Budget 2020 presented on 1st February 2020 by Finance Minister Smt. Nirmala Sitharaman. It has been proposed to provide option to individual and HUF by insertion of section 115BAC in the Income Tax, Act 1961, which provides the following:

(i) On satisfaction of certain conditions, an individual or HUF shall, from financial year 2020-21 onwards, have the option to pay tax in respect of the total income at following rates:
Total Income (Rs) Rate
Upto 2,50,000 Nil
From 2,50,001 to 5,00,000 5 per cent
From 5,00,001 to 7,50,000 10 per cent
From 7,50,001 to 10,00,000 15 per cent
From 10,00,001 to 12,50,000 20 per cent
From 12,50,001 to 15,00,000 25 per cent
Above 15,00,000 30 per cent

(ii) An individual or HUF (having no business income) shall be eligible to exercise the option for every previous year.

(iii) In cases other than (ii) above, the option once exercised for a previous year shall be valid for that previous year and all subsequent years.

(iv) The option shall become invalid for a previous year or previous years, as the case may be, if the Individual or HUF fails to satisfy the conditions mentioned in this section and accordingly other provisions of the Act shall apply;

(v) The condition for concessional rate shall be that the total income of the individual or HUF is computed-
a. without any exemption or deduction related to following-
  • Leave travel concession as contained in clause (5) of section 10;
  • House rent allowance as contained in clause (13A) of section 10;
  • Some of the allowance as contained in clause (14) of section 10;
  • Allowances to MPs/MLAs as contained in clause (17) of section 10;
  • Allowance for income of minor (Rs. 1500 per minor) as contained in clause (32) of section 10;
  • Exemption for SEZ unit contained in section 10AA;
  • Standard deduction, deduction for entertainment allowance and employment/professional tax as contained in section 16;
  • Interest under section 24 in respect of self-occupied or vacant property referred to in section 23(2). (Loss under the head income from house property for rented house shall not be allowed to be set off under any other head and would be allowed to be carried forward as per extant law);
  • Additional deprecation under section 32(1)(iia).
  • Deductions under section 32AD, 33AB, 33ABA;
  • Various deduction for donation for or expenditure on scientific research contained in Section 35(1)(ii) or (iia) or (iii) or section 35(2AA);
  • Deduction under section 35AD or section 35CCC;
  •  Deduction from family pension under section 57(iia);
  • Any deduction under chapter VIA (like section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc). However, deduction under 80CCD(2) i.e. employer contribution on account of employee in notified pension scheme and section 80JJAA i.e. for new employment can be claimed.
b. without set off of any loss-
  1. carried forward or depreciation from any earlier assessment year, if such loss or depreciation is attributable to any of the deductions referred to in “a” above; or
  2. under the head house property with any other head of income;
c. by claiming the depreciation, if any, under section 32, except section 32(1)(iia) {additional depreciation}, determined in such manner as may be prescribed; and

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

As many allowances have been provided through notification of rules, it is proposed to carry out amendment of the Income-tax Rules, 1962 (the Rules) subsequently, so as to allow only following allowances notified under section 10(14) of the Act to the Individual or HUF exercising option under this section:
  • Transport Allowance granted to a divyang employee (Person with disability) to meet expenditure for the purpose of commuting between place of residence and place of duty.
  • Conveyance Allowance granted to meet the expenditure on conveyance in performance of duties of an office;
  • Any Allowance granted to meet the cost of travel on tour or on transfer;
  •  Daily Allowance to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty.
It is also proposed to amend rule 3 of the Rules subsequently, so as to remove exemption in respect of free food and beverage through vouchers provided to the employee exercising option under the proposed section, by the employer.

(vi) The loss and depreciation referred in (v)b above 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.

(vii) This option shall be available when exercised by the individual or HUF in the form and manner as may be prescribed-
  1. Individual or HUF (having no business income), along with the return of income to be furnished under sub-section (1) of section 139 of the Act; and
  2. In cases other than “a” above, on or before the due date specified under sub-section (1) of section 139 of the Act and such option once exercised shall apply to subsequent assessment years;
(viii) If the individual or HUF has a Unit in the International Financial Services Centre (IFSC) as referred to in sub-section (1A) of section 80LA, the deduction under section 80LA shall be available to such Unit subject to fulfilment of the conditions contained in that section; and

(ix) The option exercised by individual or HUF (having business income) can be withdrawn only once and thereafter, the said individual or HUF shall never be eligible to exercise option under this section.
However, above point shall not be applicable in case such individual or HUF ceases to have any business income in which case, option under para (vii)(a) above shall be available.

Further, it has been proposed to amend section 115JC (Alternate Minimum Tax) and Section 115JD (carry forward and set off of AMT credit) of the Act so as to provide that AMT and its relevant provisions shall not apply to such individual or HUF having business income exercising option under this section.

The condition listed at (iva) above, means that the individual or HUF opting for taxation under the newly inserted section 115BAC of the Act shall not be entitled to the following exemptions/ deductions:
This amendment will take effect from Financial Year 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2021-22 and subsequent assessment years.

Author’s View-
With so many exemptions and deductions restricted by way of above provisions under this new tax regime, it is very unlikely that any benefit will accrue to the taxpayers having 80C deductions, Interest on self-occupied property and good salary structure (tax incentivised) and tax payable may be higher in some cases under this regime.

Further, restricting investment-based deductions may hamper the economic development as investing in any such prescribed modes is going to reduce if no tax benefit is going to accrue as a result of such investment.

Information Source – Memorandum on Budget. 

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