In the Finance Act, 2020 a new Section 115BAC was inserted as part of the Income Tax Act, 1961 (the Act) with a view to providing an option to a taxpayer to offer his income to tax at new lower rates. Over the years, Section 115BAC has become the default tax regime and the earlier tax regime is an option to be exercised.

Under the earlier tax regime, a taxpayer can avail multiple tax exemptions/deductions and plan the total tax outflow. As per the provisions of Section 115BAC, the taxpayer will have to forego exemptions and/or deductions like Leave travel allowance, House rent allowance, other special allowances, entertainment allowance, professional tax, etc.

To better understand the impact of the above, we should compare the tax slabs under the two tax regimes as per the Finance Bill 2025. Let us consider an employee, Mr. X, who is earning ₹15,00,000 p.a.,  is investing ₹1,50,000, specifically to save tax u/s 80C and investing ₹50,000 in NPS, both of which are eligible for tax deduction under Chapter VI-A. He is also claiming an exemption of HRA of ₹20,000 per month (by paying ₹30,000 as monthly rent). It is assumed that Mr. X is making both the above investments for the sole purpose of claiming tax deductions under Chapter VI-A. The tax liability of such an employee will be as follows:

From the above calculation, it is evident that the amount of tax payable by Mr. X is lower under the default tax regime as compared to the amount of tax payable by him under the old optional tax regime. The amount of cash available in hand, after considering all the cash outflows, is greater under the default tax regime.

The surplus cash, which otherwise would have been invested in tax-deductible items generally providing low returns can now be invested to make other valuable investments that have higher growth potential. It must be noted that if Mr. X is claiming a deduction for repayment of liabilities having fixed cash outflow, irrespective of the tax regime, like housing loan and interest thereon then the Old optional tax regime may be due to availability of setoff benefit depending on the quantum of income.

Hardik Pathak is an Assistant Professor at NMIMS University.