Section 115BAC of Income Tax Act has revolutionized tax filing for Indians and NRIs alike. The Finance Act of 2020 introduced this new tax structure that offers lower rates. The 2023 Budget made it the default choice for taxpayers.
Many people struggle to understand Section 115BAC and its impact on their tax obligations. NRIs often find themselves confused about choosing between the new and old tax regimes. The new system brings simplified processes with reduced tax rates for different income brackets. However, it removes all but one of the 70 deductions and exemptions available in the old system.
This piece covers everything about the new tax regime under Section 115BAC. You'll learn about NRI-specific eligibility criteria and see a clear comparison of both tax systems to help you choose better.
What is Section 115BAC of Income Tax Act?
The Income Tax Act got a new addition with Section 115BAC through the Finance Act of 2020. This created a different tax structure that offered lower rates but fewer deductions. The new provision came into effect from FY 2020-21 for income earned at the time of April 1, 2020.
Section 115BAC lets individuals and Hindu Undivided Families (HUFs) pick between tax regimes. The Finance Act 2023 changed these rules and made the new tax regime the default option for Assessment Year 2024-25. This covers Individuals, HUFs, Association of Persons (all but one of these cooperative societies), Body of Individuals, and Artificial Juridical Persons.
Section 115BAC's main highlights include:
- Tax rates that cost less across income slabs
- Tax compliance made easier with fewer exemptions
- Standard deduction now at ₹75,000 (from FY 2024-25).
Section 115BAC simplifies filing by removing the need to track multiple deductions, though a few, like employer contributions to NPS under Section 80CCD(2), are still allowed.
For NRIs, choosing the right regime can significantly impact their tax liability, so understanding the rules is crucial. Notably, the government plans to shift Section 115BAC to Section 202 in the upcoming Income-Tax Bill, effective April 1, 2026, reinforcing its focus on tax simplification.
Eligibility Criteria for NRIs Under Section 115BAC
NRIs can fully qualify for the concessional tax rates under Section 115BAC of the Income Tax Act. The Finance Act 2024 makes the new tax regime the default option for Non-Resident Indians and residents alike.
NRIs need a clear picture of their tax eligibility framework in India. The new tax regime automatically applies to NRIs, just like resident taxpayers, unless they choose differently. Your non-resident status comes with some specific points to think about.
Indian tax returns present you with the same choice as residents. You can stick with the default new regime or opt out. The old regime might better suit your financial situation. You'll need to submit Form 10-IEA before the due date specified under section 139(1) to make this choice.
Your income sources determine how rules apply:
- For non-business income: You can switch between regimes each year by marking your preference in your ITR.
- For business income: The new regime stays your default, but you get one chance to switch back to the old regime during your lifetime.
Your NRI status makes you eligible for either tax regime. The best choice depends on your specific Indian income sources and which option offers better tax efficiency.
New Tax Regime vs Old Tax Regime: Which is Better for NRIs?
Selecting the right tax regime is a crucial decision for NRIs earning income in India, as each option offers distinct advantages depending on your financial situation. To help you make an informed choice, the table below highlights key differences between the old and new tax regimes under Section 115BAC:
So which regime should you pick? The answer depends on your deductions. The old regime lets you claim over 70 deductions including:
- House Rent Allowance (HRA)
- Leave Travel Allowance (LTA)
- Section 80C investments
- Home loan interest deductions
- Professional tax benefits
The new tax regime has lower base rates but removes most deductions. NRIs who don't claim many deductions often pay less tax this way.
Here's a real example: An NRI earning ₹55 lakh yearly would pay about ₹16.73 lakh in the old regime. The same person would pay ₹14.07 lakh in the new regime, saving ₹2.65 lakh.
Your final choice needs a complete review of your situation. Some NRIs prefer the new regime's simplicity even if they pay more tax. Double Taxation Avoidance Agreements should be part of your decision since India has these with more than 90 countries.
Deductions and Exemptions: What NRIs Can and Cannot Claim
The tax structure in Section 115BAC presents a basic trade-off - you get lower tax rates but fewer ways to save tax. NRIs must understand what they can claim to plan their taxes better.
NRIs cannot use more than 70 deductions and exemptions available in the new tax regime. The most common deductions you cannot claim include:
- Section 80C investments (PPF, ELSS, life insurance premiums)
- Section 80D health insurance premiums
- Section 80E interest on education loans
- House Rent Allowance (HRA)
- Leave Travel Allowance (LTA)
- Interest on housing loan for self-occupied property (up to ₹2 lakh)
- Section 80G donations to charities
Some vital deductions remain available under Section 115BAC. Note that NRIs can still claim:
- Standard deduction of ₹75,000 (increased from ₹50,000 in Budget 2024)
- Interest on home loan for let-out property without any upper limit
- Employer's contribution to NPS [Section 80CCD(2)] with increased limit from 10% to 14% of salary
- Deduction for family pension income [Section 57(iia)] up to ₹25,000 (increased from ₹15,000)
- Tax exemption on voluntary retirement benefits, gratuity, and leave encashment
- Deduction for additional employee cost [Section 80JJAA]
- Tax-free gifts up to ₹50,000
NRIs who earn income from letting out property in India benefit from the continued deduction of interest on home loans. Those receiving family pension can now claim the higher deduction of ₹25,000 under Section 57(iia).
Unlike resident Indians, NRIs faced certain restrictions even under the old regime. To name just one example, see investments in Public Provident Fund (PPF), National Savings Certificates (NSCs), and Post Office deposit schemes that were never available to NRIs.
So NRIs should evaluate their specific income sources from India and applicable deductions carefully before choosing between the tax regimes.
Conclusion
Section 115BAC simplifies tax calculations for NRIs earning income in India, but choosing the right regime depends on your personal finances. Since its introduction in 2020, the new regime has offered lower rates and fewer complications—though it removes many common deductions. NRIs with sizable deductions from home loans or investments may benefit more from the old regime, despite its higher rates, while those with minimal deductions often find the new regime more tax-efficient.
Some benefits, like the ₹75,000 standard deduction, employer’s NPS contributions, and interest on let-out property, are still available under the new regime. Surcharge structures at higher income levels can also affect your total tax payable.
The best approach is to compare your tax liability under both regimes. Consulting a tax expert familiar with Indian and overseas tax rules can help you make the most informed and efficient choice.
Frequently Asked Questions
Q1. What is the main difference between the new tax regime under Section 115BAC and the old tax regime?
The new tax regime offers lower tax rates across income slabs but eliminates over 70 deductions and exemptions that were available in the old regime. It aims to simplify tax filing by reducing the need to track multiple deductions.
Q2. Can NRIs opt for the new tax regime under Section 115BAC?
Yes, NRIs are fully eligible for the concessional tax rates under Section 115BAC. The new tax regime is now the default option for both resident Indians and NRIs, but they can choose to opt out and continue with the old regime if it suits their financial situation better.
Q3. How often can NRIs switch between the old and new tax regimes?
NRIs with non-business income can switch between regimes each year when filing returns. However, those with business income can switch back to the old regime only once in their lifetime after opting for the new regime.
Q4. What are some key deductions still available under the new tax regime?
Under the new regime, NRIs can still claim a standard deduction of ₹75,000, deductions on interest for let-out property loans, employer contributions to NPS, and family pension income deductions up to ₹25,000, among others.
Q5. How does the surcharge structure differ between the old and new tax regimes for high-income NRIs?
For extremely high incomes above ₹5 crore, the surcharge reaches 37% in the old regime, while it's capped at 25% in the new regime. This difference can result in substantial savings for high-income NRIs under the new regime.
