Understanding Indian taxation can be challenging, especially for NRIs trying to decide between the old and new tax regimes. Section 115BAC of the Income Tax Act, introduced by the Finance Act 2020, reshaped tax filing by offering simplified tax rates. With the Budget 2023 making it the default regime, it is now more important than ever for NRIs and resident taxpayers to understand its impact.

This comprehensive guide breaks down Section 115BAC, eligibility for NRIs, tax benefits, exemptions, and how it compares to the old regime.

What is Section 115BAC of the Income Tax Act?

Section 115BAC, introduced in FY 2020-21 through the Finance Act 2020, provides an alternative personal income tax regime. It offers reduced tax rates with minimal deductions, effective from April 1, 2020. Budget 2023 further strengthened it by making it the default regime from Assessment Year 2024-25.

Key highlights of Section 115BAC:

• Lower tax rates across multiple income slabs
• Simplified tax structure with limited exemptions
• Standard deduction of ₹75,000 (if applicable) (effective FY 2024-25)

Taxpayers can opt for the new regime or choose the old one if they meet certain conditions. For NRIs, choosing between these regimes can significantly impact their tax savings in India.

Eligibility for NRIs Under Section 115BAC

Non-Resident Indians (NRIs) are eligible for the new concessional tax regime under Section 115BAC. As per the Finance Act 2024, the new tax regime is now the default option for all individuals, including NRIs, unless they opt out.

Points NRIs need to consider:

• Non-business income: NRIs can switch tax regimes each financial year by selecting their preference while filing the Income Tax Return (ITR).
• Business income: If an NRI has business income, they can opt for the old regime only once in their lifetime after choosing the new regime.
• Form 10-IEA must be filed before the due date under Section 139(1) to switch to the old regime.

Your choice of tax regime should depend on your Indian income sources and applicable deductions.

Old Tax Regime vs New Tax Regime: Best Choice for NRIs

When filing Indian taxes, NRIs must choose between the old and new tax regimes. Each has its own advantages.

Example:
If an NRI earns ₹55 lakh annually, their tax under:

• Old Regime: ₹16.73 lakh
• New Regime: ₹14.07 lakh
• Savings: ₹2.65 lakh under the new regime

Deductions & Exemptions Under Section 115BAC for NRIs

The main trade-off in Section 115BAC is fewer deductions in exchange for lower tax rates. NRIs should be clear about what can and cannot be claimed under this regime.

Deductions NOT allowed under 115BAC:

• Section 80C (PPF, ELSS, life insurance)
• Section 80D (Health insurance)
• Section 80E (Education loan interest)
• HRA and LTA
• Interest on self-occupied housing loan (up to ₹2 lakh)
• Section 80G (Donations)

Deductions STILL allowed under 115BAC:

• ₹75,000 standard deduction (if applicable) (from FY 2024-25)
• Interest on home loan for let-out property (no upper limit)
• Employer’s NPS contribution under Section 80CCD(2) (now 14%)
• Family pension income deduction [Section 57(iia)] up to ₹25,000
• Gratuity, leave encashment, VRS benefits (exempt)
• Additional employee cost deduction [Section 80JJAA]
• Gifts up to ₹50,000 (tax-free)

Note: NRIs have limited access to traditional Indian tax-saving instruments like PPF or NSC. Hence, the choice of tax regime should consider actual income and available deductions.

Conclusion: Choosing the Best Tax Regime as an NRI

Section 115BAC streamlines tax compliance for NRIs earning in India. Lower rates, fewer deductions, and reduced paperwork make it attractive. However, if you have high deductible investments or home loan benefits, the old regime may offer better savings.

Key takeaway: Evaluate both regimes based on your personal income sources and allowable deductions. High-income NRIs should also consider the reduced surcharge under the new regime (25% vs 37%).

Consult a qualified tax expert in NRI taxation to compare both options and select the regime that best minimizes your tax liability in India.

Frequently Asked Questions on Section 115BAC for NRIs

Q1. What’s the difference between Section 115BAC and the old tax regime?

The new tax regime offers lower slab rates but removes 70+ deductions allowed in the old regime. It simplifies filing but limits tax-saving options.

Q2. Can NRIs use Section 115BAC tax rates?

Yes, NRIs are fully eligible for Section 115BAC. It is the default regime, and they may opt out if preferred.

Q3. Can NRIs switch tax regimes?

NRIs with non-business income can switch every year. For business income, you can opt out of the new regime only once.

Q4. What deductions are still allowed under 115BAC for NRIs?

You can claim ₹75,000 standard deduction (if applicable), home loan interest on let-out property, employer NPS contributions, and ₹25,000 for family pension.

Q5. How does surcharge differ in both regimes?

The surcharge for income above ₹5 crore is 37% in the old regime but capped at 25% under the new regime—this results in tax savings for high-income NRIs.