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Guide to New Tax Regime with Marginal Relief

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Section 115BAC of the Income Tax Act, 1961

New Tax Regime was introduced by the Finance Act, 2020 and became effective from the assessment year 2021-2022 (financial year 2020-2021). This section provides an optional tax regime for individuals and Hindu Undivided Families(now also made applicable to Societies, AOP, BOI Artificial Juridical person by finance Act 2023) with certain conditions. Taxpayers can choose to be taxed under a lower tax rate structure while forgoing certain deductions and exemptions. The key features of Section 115BAC are as follows:

  1. Lower tax rates[ as amended by Finance Act 2023]: The rates funder New Tax Regime are as follows:
    • For individuals, HUFs, AOP( other than co-operative Society), BOI, Artificial Juridical Person:
      • Up to INR 3 lakh: Nil
      • INR 3 lakh to INR 6 lakh: 5%
      • INR 6 lakh to INR 9 lakh: 10%
      • INR 9 lakh to INR 12 lakh: 15%
      • INR 12 lakh to INR 15 lakh: 20%
      • Above INR 15 lakh: 30%
  2. Exclusions: Taxpayers opting for the new tax regime under Section 115BAC cannot claim certain deductions and exemptions available under the regular tax regime. Some of the common exclusions include:
    • Deductions under Chapter VIA
    • Exemptions such as House Rent Allowance under Section 10(13A) and Leave Travel Allowance under section 10(5), and exemption under section 10, 10AA, 10(140, 10(17), 10(32), 16(ii),16(iii), 32(1)(iia), 32AD, 33AB,33ABA, 35(1)(ii)/(iia),35(2AA), 35AD, 35CCC, 57(ii)(a)
    • Interest on House Property under section 24(b)
  3. Allowable: However Followings are allowed under new Tax Regime:
    • Deduction under section 80CCD(2) NPS contribution by Employer, deduction under section 80CCH and 80JJAA
    • Standard Deduction Rs. 50,000
    • Rebate u/s 87A is available up to Rs. 25000 if total income calculated under this section do not exceed 7 lakhs. Marginal relief is also available under section 87A. i.e The tax liability will now be the lower of the tax calculated as per the slab or the amount by which taxable income exceeds Rs 7 lakh.
    • Example of Marginal Relief: Assesee has Total Taxable income of Rs. 7,10,000 then tax laibility will be lower of Tax on 7,10,000(i.e 26000) and 10,000 that is 10,000 and 16000 will be the amount of Mrginal relief.
  4. Other provisions: Taxpayers who opt for the new tax regime under Section 115BAC cannot set off certain losses, such as house property losses, against other heads of income.
  5. Option must be exercised on or before due date for file the return under section 139(1)
  6. Provided that Such option once exercised by the person having income from business or profession shall apply in subsequent year also and it can be withdrawn only once and that person will never be eligible to exercise option again unless such person ceases to have income from business and profession.

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