Direct Tax Alert - CBDT makes consequential changes in IT Rules to give effect of amended section 115BAC of the IT Act

Background

The Finance Act 2023 amended provisions of section 115BAC of the Income-tax Act, 1961 (IT Act) by revising the slab rates under the new tax regime for the Fiscal Year (FY) 2023-24 and onwards. The scope of the new tax regime which was erstwhile applicable to individuals and Hindu Undivided Family has been extended to the Association of Persons, Body of Individuals and Artificial Juridical Person. Further, the new tax regime is made the default regime for taxpayers with effect from the return of income filed for FY 2022-23 onwards. In order to give effect of these amendments, the Central Board of Direct Taxes (CBDT) has issued a notification¹ to implement consequential changes in Rule 2BB, Rule 3 and Rule 5 and the newly introduced Rule 21AGA in the Income-tax Rules, 1962 (IT Rules). We, at BDO in India, have hereunder analysed and summarised key provisions of the said notification:

• Amendment in Rule 2BB of the IT Rules
  • Rule 2BB of the IT Rules pertains to allowances exempt under section 10(14) of the IT Act. Prior to the amendment by Finance Act 2023, Rule 2BB(3) stated that a taxpayer, being an employee, who has exercised the option under section 115BAC(5)²  of the IT Act would not be eligible for the benefits (baring those specifically mentioned)³  available under Rule 2BB (subject to certain conditions).
  • As the new tax regime under section 115BAC of the IT Act is now the default tax regime for taxpayers, Rule 2BB(3) of the IT Rules has been amended to specify that the benefits (baring those specifically mentioned)² of this Rule will not be available to a taxpayer, being an employee, whose income is taxable under section 115BAC(1A) of the IT Act.
• Amendment in Rule 3 of the IT Rules
  • Rule 3 of the IT Rules pertains to the valuation of perquisites. Prior to the amendment by Finance Act 2023, the second proviso to clause (iii) of Rule 3(7) of the IT Rules provided that the exemption provided in the first proviso in respect of free food and non-alcoholic beverage provided by an employer through paid voucher shall not apply to a taxpayer, being an employee, who has exercised the option under section 115BAC(5) of the IT Act.
  • The second proviso is amended to provide that the exemption provided in the first proviso shall not apply to the taxpayer, being an employee, whose income is chargeable to tax under section 115BAC(1A) of the IT Act.
• Amendment in Rule 5 of the IT Rules
  • Rule 5 of the IT Rules pertains to Depreciation. The first proviso to Rule 5(1) of the IT Rules provides a ceiling limit of 40% on depreciation on any block of assets entitled to depreciation at more than 40%. This proviso is amended and made applicable to taxpayers whose income is chargeable to tax under section 115BAC(1A) of the IT Act.
  • The third proviso to Rule 5(1) of the IT Rules pertains to the Written Down Value (WDV) of the block of an asset. This proviso has been amended and [as it stood immediately before its amendment by the Finance Act 2023] shall be inserted after “for the purpose of section 115BAC”.
  • After the third proviso, a new proviso shall be inserted stating that if the income of a taxpayer is chargeable to tax under section 115BAC(1A) of the IT Act then the unabsorbed depreciation (attributable to the additional depreciation) would be allowed to be added to the WDV of the block of assets as on 1 April 2023 if following conditions are satisfied:
    • The taxpayer has not exercised the option under section 115BAC(5) of the IT Act for any FY beginning on or before 1 April 2022; and
    • There is unabsorbed depreciation (attributable to the additional depreciation) in the block of assets which has not been given full effect prior to FY beginning on 1 April 2023.
• Inserting Rule 21AGA in the IT Rules      
  • The manner for opting out and re-entering the new tax regime with effect from FY 2023-24 onwards under section 115BAC(6) of the IT Act is prescribed by Rule 21AGA in the IT Rules, which is as below:
    • In case of a taxpayer having income from business or profession- The taxpayer is required to furnish Form 10-IEA electronically either under a digital signature or electronic verification code on or before the due date specified under section 139(1) of the IT Act. The taxpayer is required to mention in the Form whether he/she is opting out or re-entering the new tax regime provided under section 115BAC(1A) of the IT Act.
    • In case of a taxpayer not having income from business or profession- Such taxpayer can opt-out/ re-enter the new tax regime by exercising the option in the return of income to be furnished under section 139(1) of the IT Act.
• These Rules shall be effective from 21 June 2023.

BDO in India Comments:

While the Finance Act 2023 had amended the provisions of section 115BAC of the IT Act, consequential changes were yet to be notified. With the due date of filing the return of income approaching, CBDT has timely notified the relevant Rules. It is pertinent to note that taxpayers having income from business and profession will not be able to switch between old and new tax regimes more than once.     

Subscribe to receive the latest BDO News and Insights

Please fill out the following form to access the download.