Alternate Tax Regime (ATR) for individual or HUF Income Tax payers

– CA Siddhant Agrawal

With a view to boost the economy and put Country’s tax rate on par with other Asian Countries and attract investment, our Finance Minister Smt. Nirmala Sitharaman reduced effective Corporate tax rate for New Manufacturing Company to 15% from 25%. However, such companies cannot claim other incentives.

During presentation of Budget for 2020-21 on the same principle the Finance Minister proposed an Alternate Tax Regime for individuals and HUFs by way of new section 115BAC and the same will apply in relation to the assessment year 2021-22 and subsequent assessment years.

1. Income tax rate reduction under the Alternate Tax Regime (ATR)

The word Alternate itself indicates that there is another tax regime existing already, hence the scheme u/s 115BAC is optional one. With effect from assessment year 2021-22 onwards, the Individual or HUF taxpayers, have the option to pay tax in respect of the total income under the new optional income tax regime at lower rates provided they forego specified exemptions and deductions.

In both the tax regime, exemption limit has been retained at Rs. 250000/- but the slab rates have been reoriented as mentioned in the above chart. In both tax regime individual having income upto Rs. 5 lakhs will not be required to pay any income tax as they will continue to get tax rebate u/s 87A upto Rs. 12,500.

Total Income and Slab Rate on Existing Tax Regime and Alternate Tax Regime.

Existing Tax Regime Alternate Tax Regime

Existing Tax RegimeAlternate Tax Regime
Upto Rs. 2,50,000NilUpto Rs. 2,50,000Nil
Rs. 2,50,001 – 5,00,0005%Rs. 2,50,001 – 5,00,0005%
Rs. 5,00,000 – 10,00,00020%Rs. 5,00,001 – 7,50,00010%
Above Rs. 10,00,00030%Rs. 7,50,001 – 10,00,00015%
Rs. 10,00,001 – 12,50,00020%
Rs. 12,50,001 – 15,00,00025%
Above Rs. 15,00,00030%

 Prima facie, with lower rates of tax, it might seem that the newly introduced regime might help to reduce the income tax burden of all taxpayers. However, whether the new alternate tax regime is beneficial to taxpayers, will differ from person to person and it will depend upon the aggregate amount of deductions/exemptions to which the Individual/HUF taxpayer is eligible to claim under the existing tax regime.

Individual taxpayers & Tax Professional must carefully consider, what (exemptions and deductions) goes out and to what extent tax benefits are available if one chooses the alternate tax regime, and opt for the tax regime accordingly.

2. Exemptions and deductions to be foregone:

Around 70 exemptions and deductions won’t be available in the new regime. One must check the impact of foregoing these exemptions. These include:

  1. Standard deduction of Rs. 50,000 available u/s 16 in respect of Income from Salary.
  2. House Rent allowance [u/s 10(13A)]
  3. Housing Loan Interest [u/s 24(b)] in respect of self occupied property
  4. Investments under Sec 80C: Rs. 1.50 Lakhs
  5. Medical Insurance Premium (u/s 80D)
  6. Leave Travel Allowance [section 10(5)]
  7. NPS (National Pension System) Contribution (80CCD): Rs 50,000
  8. Savings Bank Interest: Rs 10,000 under Sec 80TTA
  9. Interest Income (for senior citizens): Rs 50,000 under Sec 80TTB
  10. Interest paid on Education Loans (80E)
  11. Disability of self or dependent (80DD): Upto Rs 75,000 or Rs 1.25 lakh depending on disability.
  12. Treatment of self or dependent for specified disease (80 DDB): Rs 40,000 (Rs 1 lakh for senior citizens).
  13. Donations to specified entities (u/s 80G, 80GGA, 80GGC): 50%-100% of the amount donated/contributed
  14. Deductions under section 32AD, 33AB, 33ABA, 35AD or section 35CCC
  15. Allowances to MP/MLAs as contained in section 10(17)

3. Exemptions and deductions that stay

Around 50 tax exemptions/deductions have been left untouched in the Budget. These include:

  1. Standard Deduction on Rent: 30% of the rent received
  2. Agricultural Income: No limit
  3. Amount received from Life Insurance: If insurance cover is upto10 times of the annualized premium
  4. Retrenchment Compensation: Rs 5 lakh
  5. VRS proceeds: Rs 5 lakh
  6. Leave encashment on retirement: Rs 3 lakh (No limit for Govt. workers)
  7. Employer contribution on account of employee in notified pension scheme under Section 80CCD(2)
  8. Deduction under section 80JJA for new employment
  9. Certain Allowances notified under Section 10(14):
  • Transport Allowance granted to a divyang employee to meet expenditure for the purpose of commuting between place of residence and place of duty
  • Conveyance Allowance granted to meet the expenditure on conveyance in performance of duties of an office
  • Any Allowance granted to meet the cost of travel on tour or on transfer
  • Daily Allowance to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty

4. Option needs to be exercised

The concessional rate shall not apply unless option is exercised by the individual or HUF in the form and manner as may be prescribed,-

(i)  where such individual or HUF has no income under the head business or profession,

along with the return of income to be furnished under section 139 (1); and

(ii)  in any other case, on or before the due date specified under section 139 (1) for furnishing the return of income for any previous year relevant to the assessment year commencing on or after 1st April, 2021 and such option once exercised shall apply to subsequent assessment years;

5. Entitlement to withdraw from paying tax under the new regime:

In case of individual of HUF not having any business income, the taxpayer may withdraw or exercise the option, based on his comparative tax calculation, every year.

Limitation in case of taxpayers having business income: In case of individual or HUF having business income, the option to pay tax under the new regime can be withdrawn only once (for a previous year other than the year in which it was exercised) and thereafter, the individual or HUF shall never be eligible to exercise option under this section, except where such individual or HUF ceases to have any business income in which case, option shall be available as in case of taxpayers having no business income.

6. Set off of Loss or depreciation not permitted:

(a)  The income of such taxpayer opting for alternate tax regime is to be computed without set off of any loss carried forward or depreciation from any earlier assessment year if such loss or depreciation is attributable to any of the deductions referred to in para (2) above. Likewise, the income of such taxpayer is to be computed in case of loss under the head house property without any set off of such loss with any other head of income.

(b)  The loss or depreciation shall be deemed to have been given full effect to and no further deduction for such loss or depreciation shall be allowed for any subsequent year so however, that where there is a depreciation allowance in respect of a block of asset which has not been given full effect to prior to the assessment year beginning on 1st April, 2021, corresponding adjustment shall be made to the written down value of such block of assets as on 1st April, 2020 in the prescribed manner, if the option is exercised for a previous year relevant to the assessment year beginning on 1st April, 2021

7. AMT (Alternate Minimum Tax) shall not apply:

It has been noted that section 115JC has been amended so as to provide that the provisions relating to Alternate Minimum Tax (AMT) shall not apply to such individual or HUF having business income.

8. Bonanza for New Salaried Taxpayer

The Alternate Tax Regime is beneficial most to Pensioners as well as young salaried persons, as they may have no investments in tax saving schemes and further they have the option to choose as many times as they desire in future.

9. Relaxation to taxpayers due to COVID-19 pandemic

The present coronavirus pandemic, situation brings some beneficial provisions to all taxpayers who like to donate in PM CARES Fund and can claim 100 percent deduction from taxable income. The Finance Ministry has issued a clarification on 31st March, 2020 and announced that PM CARES Fund will get the same tax treatment as available to Prime Minister National Relief Fund and all donations to PM CARES FUND are eligible for 100 percent deduction under section 80G of the Income Tax Act. Further, the general limit on deduction of 10 percent of gross income shall also not be applicable for donation made to PM CARES Fund.

Furthermore, all assessee has been allowed to make this deposit till 30th June, 2020 and claim 100 percent deduction from income of F.Y. 2019-20. Taxpayer availing this 80G deduction will not lose his right of choosing option of ATR for income of F.Y.2020-21. This PM CARES Fund provision is a part of “The Taxation and Other Laws (Relaxation of certain provisions) Ordinance,2020” promulgated on 31st March,2020.

10. Conclusion

To decide whether to choose Existing Tax Regime or switch over to Alternate Tax Regime, an individual taxpayer should look into their level of Income and level of tax savings investments, Deductions/Exemptions for which he is eligible for the respective financial year. Informed advice from tax professionals would help the taxpayers in opting for the most suited taxation regime.

Furthermore, a careful consideration and precautions are required in respect of impact of Dividend Income earned during the year. All Individual taxpayers will have to bear tax on their dividend income w.e.f. Asst year 2021-22. It will be added to their taxable income and taxed at the applicable slab rate.

Thus, the taxpayers need to check their tax liability under the existing regime and new optional regime and should carefully decide whether to go for new tax regime or not. An individual who is currently availing more deductions and exemption may choose to avail them and continue to pay tax as per the old regime.

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About the author: Mr. Siddhant Agrawal is a Chartered Accountant and has been practicing in taxation laws for the last five years. He is also a Cost and Management Accountant and has been an All-India rank holder in examinations.

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