New Tax Regime (Section 115BAC)

The New Tax Regime (Section 115BAC) is the default personal income tax framework in India for individuals, Hindu Undivided Families (HUFs), Associations of Persons (AOPs), and Bodies of Individuals (BOIs). Introduced under the Income-tax Act, 1961, it provides lower concessional slab rates across income bands while withdrawing most traditional tax deductions and exemptions.

How the New Tax Regime (Section 115BAC) Works

Under Section 115BAC(1A), this concessional structure operates as the statutory default. Eligible taxpayers are assessed under these rates automatically unless they actively opt out to compute income tax under the old regime.

The income tax slabs applicable under Section 115BAC are structured as follows:

Resident individuals benefit from a full tax rebate under Section 87A of up to Rs. 25,000 on taxable income up to Rs. 7,00,000, reducing net tax payable to zero. Marginal relief is provided where taxable income marginally exceeds Rs. 7,00,000. Salaried employees and pensioners receive a flat standard deduction of Rs. 75,000 under Section 16(ia). Consequently, a salaried individual earning a gross salary up to Rs. 7,75,000 incurs zero net income tax liability.

For high-net-worth individuals, Section 115BAC caps the highest applicable surcharge rate at 25%, compared to 37% under the old regime, reducing the peak effective tax rate for taxable income above Rs. 5 crore from 42.744% to 39%.

Allowable Deductions and Inadmissible Exemptions

The primary trade-off under Section 115BAC involves exchanging itemized tax deductions for lower statutory slab rates.

Inadmissible Exemptions and Deductions

Taxpayers evaluated under the new regime cannot claim several popular deductions:

• House Rent Allowance (HRA) under Section 10(13A).
• Leave Travel Concession (LTC) under Section 10(5).
• Chapter VI-A investments, including Section 80C deductions (such as EPF, PPF, life insurance, and ELSS), Section 80D medical insurance, and Section 80E higher education loan interest.
• Interest on housing loans for self-occupied properties up to Rs. 2,00,000 under Section 24(b).
• Professional tax under Section 16(iii).
• Set-off of any loss from house property against salaries, business income, or capital gains.

Permissible Deductions Retained

Specific statutory reliefs remain claimable under Section 115BAC:

• Standard deduction of Rs. 75,000 for salaried employees and pensioners under Section 16(ia).
• Family pension deduction under Section 57(iia) up to Rs. 25,000 or one-third of the pension, whichever is lower.
• Employer contribution to the National Pension System (NPS) under Section 80CCD(2), allowable up to 14% of basic salary and dearness allowance for both private and public sector employees.
• Deduction for additional employee costs under Section 80JJAA for eligible employers.
• Specific allowances under Section 10 exempt income, including daily allowance, travel or tour allowance, conveyance allowance incurred for official duties, and transport allowance for employees with benchmark disabilities.
• Retirement settlements, including statutory gratuity under Section 10(10) and leave encashment under Section 10(10AA).

Regime Selection Rules and Form 10-IEA Compliance

The mechanism for choosing between regimes depends entirely on whether the taxpayer earns income from a business or profession.

1. Taxpayers Without Business Income

Salaried employees, pensioners, and individuals earning solely from salaries, house property, or capital gains can evaluate their comparative tax liability annually. They select their regime directly when filing their annual income tax return under Section 139(1). No advance declaration or separate departmental form is required.

2. Taxpayers With Business or Professional Income

Individuals, HUFs, and entities earning income from a business or profession (including those declaring receipts under Section 44AD presumptive income) face strict switching restrictions. Because the new regime is default, taxpayers wishing to compute tax under the old regime must submit Form 10-IEA electronically on the official portal of the Income Tax Department on or before the due date specified under Section 139(1).

Furthermore, business taxpayers are permitted only one opportunity in their lifetime to opt out of the new regime and subsequently return to it. Once they switch back to the new regime, they cannot opt into the old regime again in any future year, provided they continue to earn business or professional income.

The flowchart below illustrates the regime selection rules and Form 10-IEA filing requirements across taxpayer categories:

flowchart TD
    A["Taxpayer Assessment"] --> B{"Has Business Income?"}
    B -- "No (Salaried/Pension)" --> C["Choose Regime in ITR"]
    C --> D["New Regime Default"]
    C --> E["Opt Old Regime Annually"]
    B -- "Yes (Business/Profession)" --> F{"Opt Out of New?"}
    F -- "Yes" --> G["File Form 10-IEA Before Due Date"]
    F -- "No" --> H["Taxed Under Default 115BAC"]
    G --> I["Old Regime Applied"]

Employer TDS Obligations under Section 192

Corporate payroll administrators play a central role in applying Section 115BAC during monthly salary disbursements. Under Central Board of Direct Taxes (CBDT) Circular No. 04/2023, employers must seek an intimation from each employee at the beginning of each financial year regarding their preferred tax regime.

If an employee does not provide an intimation, the employer must compute Tax Deducted at Source (TDS) under Section 192 using the default New Tax Regime. However, an employee's choice for monthly salary withholding is not irrevocable; the employee can finalize a different regime when submitting the annual income tax return under Section 139(1). To review broader withholding rates, refer to our detailed guide on TDS calculation in India.

Managing dual-regime declarations, dynamic mid-year updates, and Form 16 reconciliations requires dependable enterprise systems. Organisations partner with MYND for payroll outsourcing and rigorous payroll compliance management. Using our proprietary payroll platform MyPay, we process over 6M+ payslips a year with 99% payroll and vendor accuracy, helping employers maintain seamless declarations, automated tax projections, and timely quarterly filings.

Old vs New Regime: Comparative Tax Calculation

To evaluate how the revised tax slabs affect take-home pay, consider a salaried resident employee with an annual gross salary of Rs. 15,00,000. Under the old regime, the employee claims Rs. 50,000 standard deduction, Rs. 1,50,000 in Section 80C, Rs. 25,000 in Section 80D, and Rs. 1,50,000 in HRA exemption (total deductions of Rs. 3,75,000).

Even though the employee foregoes Rs. 3,75,000 in deductions, the lower slab progression under Section 115BAC results in an annual tax saving of Rs. 26,000. Generally, a salaried employee must claim more than Rs. 3,75,000 to Rs. 4,00,000 in aggregate exemptions and deductions for the old regime to be advantageous.

Common Compliance Mistakes to Avoid

Finance professionals and individual filers frequently encounter avoidable pitfalls under Section 115BAC:

• Missing the Form 10-IEA filing deadline: Taxpayers with business or professional income who wish to opt for the old regime must file Form 10-IEA before the due date specified under Section 139(1). Filing a belated return invalidates the opt-out, forcing assessment under the default new regime.
• Failing to declare NPS employer contributions: While employee contributions under Section 80CCD(1) are disallowed, employer contributions under Section 80CCD(2) remain eligible up to 14% of salary. Overlooking this in payroll configuration inflates employee tax liability.
• Incorrect assumptions about Section 87A rebate: The full tax rebate applies up to taxable income of Rs. 7,00,000. For salaried workers, the standard deduction increases this threshold to Rs. 7,75,000 gross salary. Taxpayers earning slightly above this threshold should verify marginal relief computations.
• Ignoring carry-forward loss restrictions: Losses from house property cannot be set off against salary or business income under Section 115BAC.

Related Statutory Provisions and Notice Processing

Understanding Section 115BAC requires reviewing connected provisions under the Income-tax Act. Taxpayers evaluating their returns should review Section 80C (Tax Deductions) and Section 10 (Exempt Income) to determine whether eligible claims exceed concessional slab benefits. Furthermore, when regime elections or withholding reconciliations produce discrepancies, the Centralized Processing Centre issues a Notice under Section 143(1) detailing adjustments made between reported declarations and departmental tax assessments.

Conclusion: Strategic Assessment of the New Tax Regime (Section 115BAC)

The New Tax Regime (Section 115BAC) simplifies personal income tax compliance across India by lowering statutory tax slabs and eliminating documentation overhead. For salaried professionals with typical investment profiles, it yields substantial tax savings and higher monthly take-home pay. However, business taxpayers and individuals carrying extensive housing loans or rental exemptions must conduct comparative annual calculations and observe Form 10-IEA deadlines before electing their tax path.

Frequently Asked Questions

Can salaried employees switch between the old and new tax regimes every year?

Yes. Salaried employees and individuals with no business or professional income have the flexibility to switch between the old and new tax regimes every financial year. The choice is exercised directly while filing the annual income tax return on or before the due date under Section 139(1).

What happens if an employee does not declare their preferred tax regime to their employer?

If an employee does not submit a regime intimation at the beginning of the financial year, the employer is legally obligated under CBDT Circular No. 04/2023 to deduct TDS under the default New Tax Regime. However, the employee can still choose the old regime when filing their annual income tax return.

Is standard deduction available under Section 115BAC?

Yes. Salaried taxpayers and pensioners assessed under Section 115BAC are entitled to a standard deduction of Rs. 75,000 under Section 16(ia). Family pensioners are also eligible for a standard deduction under Section 57(iia) of up to Rs. 25,000 or one-third of the pension, whichever is lower.

Can I claim home loan interest deductions under the new tax regime?

Under Section 115BAC, deduction of interest on a housing loan for a self-occupied property under Section 24(b) is not allowed. For let-out properties, loan interest can be deducted up to the amount of taxable rent, but any net loss arising from house property cannot be set off against other income heads like salary or business income.