The Income Tax Act, 1961 extends to the whole of India. The Act has undergone several changes over the years bringing into scope all the possible sources of income, whether disclosed or undisclosed at rates provided in the Finance Act for a financial year. The Income Tax Law comprises of the following components.
- Income Tax Act, 1961
- Income Tax Rules, 1962
- The Finance Act
- Government Notifications
- Court Decision
THE BASIS FOR TAXATION
Income tax is a Direct Tax which means the tax levied on the income or profit earned by the person and not on the supply of goods or services. The Income Tax Law provides that a person shall be liable to pay tax for the income one has earned in the Financial Year in the Assessment Year on the basis of the person’s residential status as the tax rates are different for one who is resident and ordinary resident, resident but not an ordinary resident and a non-resident. This means if one has earned income in the year beginning from 01.04.2020 to 31.03.2021, Financial Year 2020-2021 the person will be liable to pay tax and be assessed in the Assessment Year 2021-2022.
A person as mentioned in the Income Tax Law is
- An individual
- Hindu Undivided Family (HUF)
- A firm
- Association of Persons (AOP) / Body of Individuals (BOI)
- Artificial Juridical Person (AJP)
THE NEW REGIME
The Income Tax law is vast and has several sections and provisions. This section 115BAC of the Income Tax Law has brought relief to taxpayers. This new regime introduced in the Income Tax Law which is effective from Financial Year 2020-2021. Introduced in the Union Budget 2020, this new scheme applies only to Individual and HUF. The new regime provides for the following tax rates for the income earned by an individual and HUF during a Financial Year.
Nil to Rs.2,50,000
Above Rs. 2,50,000 to Rs. 5,00,000
Above Rs. 5,00,000 to Rs. 7,50,000
Above Rs. 7,50,000 to Rs. 10,00,000
Above Rs. 10,00000 to Rs. 12,50,000
Above Rs. 12,50,000 to Rs. 15,00,000
Above Rs. 150,00,000
For someone to opt for taxation under section 115BAC, there are certain conditions to be fulfilled.
- The total income should not include business income
- The exemptions u/s 80 would not be entitled to a deduction from gross total income except u/s 80CCD and 80JJAA
- The assessee cannot claim a standard deduction
- The assessee cannot claim a deduction of interest on a loan paid on a self-occupied or a vacant house property
- The assessee has to forego allowances and perquisites as deductions from salary if underemployment
- The assessee cannot claim a deduction of Family pension income
- The assessee cannot claim the deduction of Professional tax.
OPTION TO CHOOSE
It is at the discretion of the assessee whether or not to opt for the new regime, i.e. to pay taxes under section 115BAC or not. The option to choose is to be evaluated by comparing the net cash outflow to be incurred by the assessee in both the old scheme and the new scheme.
The purpose of any law is to protect the interest of the public and not to abuse them. The Income Tax Law always tends to bring in amendments to curb the practice of avoidance of tax and illegal means to escape paying taxes. The new regime has its pros and cons. What may seem to be beneficial to one assessee, may be detrimental to another assessee. The eligibility required to opt for the scheme may itself look like the cons of the introduction of this scheme but for someone who seems to be benefited by the scheme, the pros are that there will be no difficulty in documenting the records of deductions and investment or donation receipts as the assessee will not be exercising the right to claim the deduction or exemption under the scheme. Another pros or cons is that the limit of non-taxability of income stands at Rs. 2,50,000 for all the age group that stands to differ from the old regime which had different slabs for different age groups divided as below 60, 60 to 80 and above 80. What is common between the old and new scheme is the deduction under 87A. The benefit of claiming a rebate up to Rs.12500 if the total taxable income falls under Rs. 5,00,000 is still available under the old and new scheme. Hence the purpose of the Income Tax Law maintains to serve. This will bring harmonization in abiding by the filing of returns as it will become easier for taxpayers to understand and also make it hassle-free for deductors to ascertain the tax liability of a person and how much TDS (Tax Deduction at Source) has to be deducted without shortfall as the assessee cannot claim any further deductions.
The introduction of the new regime seems to look beneficial on the face of it and a lot of us get attracted by looking at the lower rates of taxes but what needs more attention is the fact that a lot of other benefits of deductions and expenses that can be otherwise claimed under the old regime has to be foregone and that the option to choose the new regime will only result in more cash outflow than it may look. The law also requires one to inform the employer if one in the service wants to opt or not for taxation under the new regime at the beginning of the Financial Year failing which the assessee would be taxed and assessed under the old scheme. It can be said that the new regime under section 115 BAC may be beneficial to the people who have high income and do not invest much in 80C deduction schemes but it will be a better practice to compute the tax liability under both the options and decide which will be more beneficial to opt for, to every independent assessee based on income, investments, deductions and also the age group.
Author(s) Name: Sidharth R Mehta (Student, Bennett University, Noida)