Understanding Section 115BAC: Optional to Default
Are you confused about whether to opt for the old or new tax regime in India for the financial year 2025-26? Section 115BAC of the Income Tax Act, 1961, holds the key to understanding the new tax regime, which has evolved significantly since its introduction in 2020. As of February 2025, this regime is now the default option for individuals, Hindu Undivided Families (HUFs), and other entities, offering lower tax rates but fewer deductions. Let’s break it down in this comprehensive blog post to help you decide what’s best for your financial situation.
What Is Section 115BAC and Why Does It Matter?
Section 115BAC introduced India’s new tax regime, designed to simplify tax filing by offering lower tax rates in exchange for forgoing most deductions and exemptions available under the old regime. Initially optional from Assessment Year (AY) 2021-22, it became the default regime from AY 2024-25, making it critical for taxpayers to understand its implications, especially with recent updates in the Union Budget 2025.
This blog will walk you through the evolution of Section 115BAC, its tax slabs, deductions, and how you can opt in or out, ensuring you’re well-informed for FY 2024-25 (AY 2025-26).
Evolution of the New Tax Regime Under Section 115BAC
Since its launch, Section 115BAC has undergone changes to make it more appealing and inclusive. Here’s how it has evolved over the years:
1. AY 2021-22 to AY 2023-24: The Optional Start of new regime
Back in FY 2020-21, Section 115BAC was an optional choice for individuals and HUFs. It featured lower tax rates but required taxpayers to give up most exemptions (like Section 80C or HRA). The tax slabs during this period were:
| Sl. No. | Total Income | Rate of Tax |
|---|---|---|
| 1. | Upto ₹2,50,000 | Nil |
| 2. | From ₹2,50,001 to ₹5,00,000 | 5% |
| 3. | From ₹5,00,001 to ₹7,50,000 | 10% |
| 4. | From ₹7,50,001 to ₹10,00,000 | 15% |
| 5. | From ₹10,00,001 to ₹12,50,000 | 20% |
| 6. | From ₹12,50,001 to ₹15,00,000 | 25% |
| 7. | Above ₹15,00,000 | 30% |
This regime was ideal for those with minimal deductions but less attractive for those relying on exemptions.
2. AY 2024-25: Becoming the Default Regime
From AY 2024-25, Section 115BAC expanded to include associations of persons (AoPs), bodies of individuals, and artificial juridical persons (except cooperatives), and it became the default regime. Taxpayers now need to explicitly opt out (using Form 10-IEA) new regime so as to stick with the old regime. The tax slabs were updated to:
| Sl. No. | Total Income | Rate of Tax |
|---|---|---|
| 1. | Upto ₹3,00,000 | Nil |
| 2. | From ₹3,00,001 to ₹6,00,000 | 5% |
| 3. | From ₹6,00,001 to ₹9,00,000 | 10% |
| 4. | From ₹9,00,001 to ₹12,00,000 | 15% |
| 5. | From ₹12,00,001 to ₹15,00,000 | 20% |
| 6. | Above ₹15,00,000 | 30% |
A key highlight is the increased rebate under Section 87A [ Up to 25000], ensuring no tax liability for incomes up to ₹7,00,000, making the new regime more attractive for lower-income taxpayers.
3. AY 2025-26 and Beyond: Latest Updates
The Finance (No. 2) Act, 2024, effective from April 1, 2025 (Assessment Year 2025-26), refines the slabs further, reflecting the changes introduced in the Union Budget 2024.
| Sl. No. | Total Income | Rate of Tax |
|---|---|---|
| 1. | Upto ₹3,00,000 | Nil |
| 2. | From ₹3,00,001 to ₹7,00,000 | 5% |
| 3. | From ₹7,00,001 to ₹10,00,000 | 10% |
| 4. | From ₹10,00,001 to ₹12,00,000 | 15% |
| 5. | From ₹12,00,001 to ₹15,00,000 | 20% |
| 6. | Above ₹15,00,000 | 30% |
Rebate u/s 87A was similar to AY 2024-25. I.e. no tax liability for incomes up to ₹7,00,000.
What Deductions and Exemptions Are Available (or Not) Under the New Regime?
Under Section 115BAC, income is calculated without most deductions and exemptions, including:
| Section Name | Common Nature |
|---|---|
| Section 10(5) | Travel concession or assistance (e.g., Leave Travel Allowance/LTC ). |
| Section 10(13A) | House Rent Allowance (HRA) for salaried individuals paying rent. |
| Section 10(14) (except prescribed) | Special allowances (e.g., conveyance, uniform, travel allowances, except those specifically prescribed for the new regime). |
| Section 10(17) | Daily allowance or constituency allowance for MPs/MLAs. |
| Section 10(32) | Income of a minor child (up to ₹1,500 per child or total income, whichever is lower). |
| Section 10AA | Exemption for profits from units in Special Economic Zones (SEZs) for exports. |
| Section 16(ii) | Entertainment allowance deduction for government employees (capped at ₹5,000 or 1/5th of basic salary in the old regime). |
| Section 16(iii) | Profession tax |
| Section 24(b) | Deduction for interest on borrowed capital for house property (up to ₹2,00,000 for self-occupied, no limit for let-out). |
Section 32(1)(iia) |
Additional depreciation allowance for new plant and machinery |
| Section 32AD | Deduction for investment in new plant and machinery in notified backward areas (15% of actual cost). |
| Section 33AB | Deduction for tea, coffee, or rubber businesses (40% of profits or actual expenditure, whichever is less). |
| Section 33ABA | Deduction for site restoration fund for offshore mineral exploration (20% of profits or actual expenditure). |
| Section 35(1)(ii) | Deduction for expenditure on scientific research by approved research associations (100% or 150%). |
| Section 35(1)(iia) | Deduction for in-house scientific research and development expenditure (100% or 150%). |
| Section 35(1)(iii) | Deduction for contributions to approved scientific research programs (100% or 150%). |
| Section 35(2AA) | Deduction for contributions to approved scientific research programs (125% or 100%). |
| Section 35AD | Deduction for specified businesses (e.g., cold chain facilities, affordable housing, 100% or 150% of expenditure). |
| Section 35CCC | Deduction for agricultural extension projects (150% of expenditure). |
| Chapter VI-A (except Sections 80CCD(2), 80CCH, 80JJAA) | Various deductions for savings, investments, and expenses, including: Section 80C (investments in PPF, ELSS, life insurance, etc), Section 80D (mediclaim premium ), 80E (interest on education loans), Section 80G (donations), Section 80TTA/80TTB |
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But following deductions are allowed under the new regime]:
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- Standard deduction of ₹75,000 (salary/pension).
- Employer’s NPS contribution under Section 80CCD(2) (up to 14% for government, 10% for others).
- Deduction for family pension (₹15,000 or 1/3 of pension, whichever is lower).
- Gratuity and Leave Encashment
- Allowances prescribed u/s 10(14) for new regime.
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You also can’t set off losses or depreciation from earlier years if they relate to these excluded deductions, and depreciation is calculated differently (excluding Section 32(1)(iia)).
How to Opt In (Choose) or Out of (Leave) the New Tax Regime
- Pre-AY 2024-25 (Sub-section (5)):
- For those with business income: opting in was done by the due date of filing the income tax return (Section 139(1)). This choice was locked in for future years, with a single opportunity to withdraw (except if the business income ceased).
- For those without business income: the option to opt in was available annually when filing their income tax return.
- AY 2024-25 and Beyond (Sub-section (6)): Now the default regime, you can opt out using Form 10-IEA. Business income taxpayers’ opt-outs are permanent unless business income ceases, while non-business income taxpayers can switch annually.
Special Provisions and Additional Considerations
- IFSC Units: Units in International Financial Services Centres (IFSCs) under Section 80LA can retain deductions if conditions are met, even under the new regime.
- Surcharges and Cess: Surcharges (10% to 37%) and a 4% Health and Education Cess apply based on income levels, calculated on the lower base tax of the new regime.
- Losses and Depreciation: Unutilized losses or depreciation before AY 2021-22 (or AY 2024-25 for later opt-ins) are deemed fully adjusted, with adjustments to asset values as prescribed.
Who Should Choose the New Tax Regime?
The new tax regime under Section 115BAC is ideal for:
- Taxpayers with minimal deductions or exemptions (e.g., salaried individuals without major investments or housing benefits).
- Those seeking simplicity and lower tax rates.
However, if you rely on deductions like 80C or HRA, the old regime might still be more beneficial. Use the Income Tax Department’s tax calculator on incometax.gov.in to compare both regimes for AY 2025-26.
Conclusion: Is Section 115BAC Right for You in 2025?
Section 115BAC has transformed from an optional, deduction-limited regime (AY 2021 to 2024) to a default, broader-applicable regime (AY 2024-25 onwards), with updated slabs and benefits (e.g., ₹7 lakh tax-free income) as of AY 2025-26. It’s perfect for those with simple finances but less so for those with significant exemptions. With the Union Budget 2025 making it even more attractive, now’s the time to evaluate your options using the tax calculator or consulting a tax expert.
Stay informed and make the best choice for your income tax planning in India this year.
