Clause 202 New tax regime for individuals, Hindu undivided family and others.

Income Tax Bill, 2025

Introduction

Clause 202 of the Income Tax Bill, 2025, represents a pivotal shift in the Indian tax regime for individuals, Hindu Undivided Families (HUFs), and other specified entities such as associations of persons (AOPs), bodies of individuals (BOIs), and artificial juridical persons. It is designed to streamline and simplify the computation of income tax by introducing a new tax regime with revised tax slabs and by eliminating various exemptions and deductions. This clause is a successor and evolution of the existing Section 115BAC of the Income-tax Act, 1961, which, along with the procedural Rules 21AG and Rule 21AGA of the Income-tax Rules, 1962, currently governs the new tax regime's operational framework.

The significance of Clause 202 lies in its comprehensive approach towards rationalizing the tax structure, broadening the tax base, and reducing the administrative burden both for taxpayers and the tax authorities. It reflects the government's ongoing policy direction to move towards a more transparent, equitable, and less exemption-driven tax system.

Objective and Purpose

The legislative intent behind Clause 202 is to further the government's agenda of tax simplification and to incentivize compliance by offering lower tax rates in exchange for foregoing a host of exemptions and deductions. The clause seeks to:

• Consolidate and rationalize the tax slabs for individuals, HUFs, and other specified entities.
• Eliminate the complexities associated with numerous exemptions and deductions, thereby making the tax system more straightforward and less prone to litigation.
• Provide clarity and certainty to taxpayers regarding their tax liabilities.
• Reduce the compliance burden by minimizing the need to track and claim various deductions and exemptions.
• Align the Indian tax system with international best practices, where lower rates are often paired with a broader tax base.

Historically, the Indian income tax regime has been characterized by multiple exemptions and deductions, resulting in a complex and often opaque tax structure. The new regime, as embodied in Clause 202, seeks to address these issues by offering taxpayers a choice between the old regime (with exemptions and deductions) and the new regime (lower rates, fewer deductions).

Detailed Analysis of Clause 202 of the Income Tax Bill, 2025

1. Scope and Applicability

Clause 202(1) applies to:

• Individuals
• Hindu Undivided Families (HUFs)
• Associations of Persons (AOPs) (other than co-operative societies)
• Bodies of Individuals (BOIs), whether incorporated or not
• Artificial juridical persons referred to in section 2(77)(g)

This broadens the scope beyond the initial coverage of Section 115BAC, which was originally limited to individuals and HUFs, but was later expanded to include AOPs, BOIs, and artificial juridical persons.

2. Tax Rates and Slabs

The new tax slabs under Clause 202(1) are as follows:

These slabs represent a further rationalization over the existing regime, with higher exemption limits and a more gradual progression of tax rates. For instance, the nil rate extends up to Rs. 4,00,000, and the highest 30% rate applies only above Rs. 24,00,000.

3. Computation of Total Income

Clause 202(2) mandates that total income for the purposes of the new regime shall be computed:

• Without any exemption or deduction under various provisions, including specified Schedules and Sections (e.g., Schedule III, sections 144, 19(1), 22(1)(b), 33(8), 48, 49, 45(3), 46, 47(1)(a), and most of Chapter VIII except sections 124(1), 125(3), and 146).
• Without set off of losses:
  • Carried forward or depreciation from earlier years, if attributable to the disallowed deductions.
  • Any loss under the head "Income from house property" with any other head of income.
• Without any exemption or deduction for allowances or perquisites provided under any other law in force.

This comprehensive exclusion of exemptions, deductions, and set-offs is central to the policy of broadening the tax base and simplifying compliance.

4. Treatment of Losses and Depreciation

Clause 202(3) stipulates that losses and depreciation referred to in sub-section (2)(b) are deemed to have been given full effect to, and no further deduction is allowed in subsequent years. This provision is aimed at preventing the carry-forward of losses and depreciation attributable to disallowed deductions under the new regime, ensuring a clean break from the old regime's tax treatment.

5. Exercise of Option

Clause 202(4) sets out the mechanism for exercising the option to opt into or out of the new regime:

• For persons with business or professional income:
  • Option must be exercised on or before the due date for filing the return (section 263(1)).
  • Once exercised, the option applies to subsequent years.
  • Option can be withdrawn only once (other than the year of exercise), after which re-entry is barred except in cases where the person ceases to have business/professional income.
• For persons without business or professional income:
  • Option is exercised along with the return of income for the year.

This structure is designed to prevent frequent switching between regimes, thereby providing stability and predictability in tax planning.

6. Special Provisions for International Financial Services Centre (IFSC) Units

Clause 202(5) provides a carve-out for units in IFSCs that exercised the option for any year from 2020-21 to 2023-24. For these units, certain deductions remain available, subject to specific conditions, recognizing the policy objective of promoting IFSCs as international financial hubs.

Ambiguities and Potential Issues

• The reference to various Schedules and Sections for disallowed deductions may create interpretative challenges, especially where cross-references are involved or where legislative amendments alter the referenced provisions.
• The transition provisions for losses and depreciation may require careful adjustment to prevent disputes regarding the written down value of assets and the treatment of unabsorbed depreciation.
• The rigid restriction on re-entry into the new regime after withdrawal (for business/professionals) could be viewed as unduly harsh in cases of genuine hardship or business restructuring.

Practical Implications

The practical impact of Clause 202 is far-reaching:

• Taxpayers: Individuals and entities must carefully evaluate whether the new regime is beneficial, given the loss of deductions versus the benefit of lower tax rates. Tax planning will shift from maximizing deductions to optimizing gross income.
• Businesses: SMEs and professionals will need to adapt their accounting practices, especially regarding depreciation and loss carry-forwards.
• Tax Authorities: Reduced scope for exemptions and deductions simplifies assessments and reduces litigation, but initial transition may require clarifications and robust taxpayer education.
• Compliance: The need to file prescribed forms and exercise options within strict timelines (as detailed in Rules 21AG and 21AGA) heightens the importance of procedural compliance.

Comparative Analysis with Existing Provisions

1. Comparison with Section 115BAC of the Income-tax Act, 1961

Section 115BAC, introduced by the Finance Act, 2020 and subsequently amended, is the current statutory provision for the new tax regime. The key points of comparison are as follows:

• Applicability: Initially, Section 115BAC applied only to individuals and HUFs. Recent amendments (effective AY 2024-25 onwards) have expanded its scope to include AOPs, BOIs, and artificial juridical persons, aligning with Clause 202.
• Tax Slabs: The slab structure u/s 115BAC has evolved:
  • For AY 2026-27 onwards, the slabs mirror those in Clause 202 (up to Rs. 4 lakh: Nil Rs. 4-8 lakh: 5%, etc.), ensuring continuity and predictability.
• Denial of Deductions/Exemptions: Both Clause 202 and Section 115BAC(2) deny a similar range of deductions and exemptions, though the specific references differ due to legislative drafting. Both prohibit set-off of losses attributable to such deductions and bar house property loss set-off.
• Deeming Provisions: The deeming provision for losses and depreciation is present in both, preventing carry-forward of disallowed losses/depreciation.
• Option Mechanism: Section 115BAC(5)/(6) and Clause 202(4) are substantially similar in prescribing how and when the option to opt in/out must be exercised, with similar restrictions on withdrawal and re-exercise.
• IFSC Carve-out: Both contain special provisions for IFSC units, allowing continued deduction u/s 80LA, subject to conditions.
• Procedural Rules: Section 115BAC is supplemented by Rules 21AG (for sub-section 5) and 21AGA (for sub-section 6), which specify the forms and electronic filing mechanisms. Clause 202 will require similar procedural rules, likely modeled on these existing rules.

Key Distinctions:

• Clause 202 is prospective and designed to replace/amalgamate the provisions of Section 115BAC in the new Income Tax Bill, 2025, providing a consolidated and updated framework.
• The references to various schedules and sections in Clause 202 may differ in detail from those in Section 115BAC, reflecting the new legislative architecture.

2. Comparison with Rules 21AG of the Income-tax Rules, 1962 (Exercise of Option u/s 115BAC(5))

Rule 21AG prescribes the procedure for exercising the option u/s 115BAC(5). Key features include:

• The option is to be exercised in Form No. 10-IE, electronically filed (digital signature or EVC).
• The Principal Director General of Income-tax (Systems) is empowered to specify filing procedures, data structure, verification, and security protocols.

Clause 202(4) continues this approach, with the expectation that similar procedural rules will be notified for exercising the option under the new regime. The emphasis remains on electronic filing and secure, standardized processes.

3. Comparison with Rule 21AGA of the Income-tax Rules, 1962 (Exercise of Option u/s 115BAC(6))

Rule 21AGA, effective from assessment year 2024-25, extends the procedural framework to a broader class of taxpayers (including AOPs, BOIs, and artificial juridical persons) and introduces Form No. 10-IEA for exercising or withdrawing the option. Key features:

• Business/professional income assessees must file Form 10-IEA by the due date for return filing.
• Others can opt in via their return of income.
• Electronic filing and EVC/digital signature are mandatory.
• Withdrawal of option is also to be done in Form 10-IEA.

Clause 202's procedural requirements are in consonance with these rules, reinforcing the government's emphasis on digital compliance and procedural certainty.

Comparative Table 

The most notable difference is the further rationalization and elevation of the exemption threshold and tax slabs in Clause 202, reflecting a continued policy of easing the tax burden on lower- and middle-income groups.

Unique Features and Potential Conflicts

• Broader Applicability: Clause 202 cements the inclusion of AOPs, BOIs, and artificial juridical persons, which were only later included u/s 115BAC through amendments and corresponding rules.
• Higher Exemption Threshold: The move to a Rs. 4 lakh nil rate and higher slabs is a significant departure, likely to benefit a larger segment of taxpayers, especially in the lower and middle-income brackets.
• Transition Management: The treatment of losses and depreciation, and the restriction on re-entry, could create hardships for taxpayers with fluctuating income profiles. There may be calls for more flexible provisions or hardship exceptions.
• Potential for Litigation: As with any major legislative shift, ambiguities in cross-references, treatment of transitional losses, and procedural lapses could lead to disputes, necessitating judicial clarification.

Conclusion

Clause 202 of the Income Tax Bill, 2025, marks a substantial evolution in the Indian tax landscape, building upon and refining the framework established by Section 115BAC and its allied rules. By further rationalizing tax slabs, broadening applicability, and eliminating most exemptions and deductions, the clause aims to create a simpler, more transparent, and equitable tax system. However, the transition to this regime will require careful management, robust procedural guidance, and possibly further legislative or judicial clarifications to address ambiguities and ensure taxpayer confidence.

The interplay between Clause 202, Section 115BAC, and Rules 21AG and Rule 21AGA reflects a maturing policy approach that balances the goals of simplification, revenue generation, and taxpayer fairness. As the regime matures, future reforms may focus on addressing edge cases, refining procedural aspects, and ensuring that the new system delivers on its promise of simplicity and efficiency.

Full Text:

Clause 202 New tax regime for individuals, Hindu undivided family and others.