Section 115BAC of the Income Tax Act, 1961, has reshaped tax strategy in India by changing how individuals approach tax planning and investments. Introduced as an optional alternative to the old tax regime, the new tax regime in India has become the default regime for individuals and Hindu Undivided Families (HUFs) from FY 2023–24 onwards, with taxpayers retaining the option to opt out each year.
Before this amendment, tax planning in India mainly focused on claiming various deductions and exemptions, especially under Chapter VI-A, such as Section 80C, 80D, and 80E, to reduce taxable income. Under the new tax regime India follows today, the emphasis has shifted toward lower slab rates with fewer exemptions, fundamentally altering how taxpayers plan their finances.
The Core Trade-Off of Section 115BAC
The new tax regime in India follows a clear trade-off: lower tax rates in exchange for the removal of most deductions. This has become a defining feature of modern tax strategy in India, requiring individuals to evaluate whether simplicity or deductions offer greater benefit.
Concessional Tax Slabs (FY 2025-26 Rates)
Under Section 115BAC, the tax slabs for the new tax regime in FY 2025–26 (AY 2026-27) are as follows:
Standard Deduction & Rebate
- Standard deduction: Salaried individuals and pensioners can claim up to ₹75,000 under the new regime.
- Rebate (Section 87A): A tax rebate of up to ₹60,000 is available, which means a taxpayer with taxable income up to approximately ₹12 lakh may effectively pay zero tax, subject to conditions.
Deductions Withdrawn
The most important impact of choosing the new regime is that approximately 70 deductions and exemptions will no longer be available. Many common tax-saving benefits used under the old tax regime cannot be claimed.
Some of the major deductions and exemptions that are not allowed under the new tax regime include:
- Section 80C: Deduction of up to ₹1.5 lakh for investments such as Equity-Linked Savings Schemes (ELSS), Public Provident Fund (PPF), employee contribution to the National Pension System (NPS), and life insurance premiums.
- Section 80D: Deduction for health insurance premiums paid for self and family.
- Section 24(b): Deduction of up to ₹2 lakh on interest paid on a home loan for a self-occupied house property.
- House Rent Allowance (HRA) and Leave Travel Allowance (LTA) exemptions.
However, a few benefits remain. Notably, the standard deduction and, in some circumstances, NPS employer contributions (80CCD(2)) are available. Additionally, deductions such as interest on let-out property remain allowed under the new regime, reducing taxable rental income.
Impact on Investments
The introduction of Section 115BAC has changed how tax-saving investments fit into an overall tax strategy in India.
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Investing Based on Goals Instead of Taxes
Earlier, a large share of annual investments was driven by the ₹1.5 lakh deduction under Section 80C. As a result, investors commonly choose products such as ELSS mutual funds or other tax-saving instruments—sometimes prioritising tax benefits over suitability for their financial goals.
With the introduction of Section 115BAC and the optional new tax regime, many taxpayers no longer receive deductions such as those under Section 80C. This shift has encouraged a more goal-based approach to investing. Instead of selecting products primarily for tax savings, investors are now advised to evaluate investments based on expected returns, risk level, liquidity, and alignment with specific financial goals such as retirement, education, or wealth creation.
Tax efficiency still matters, but under the evolving tax strategy in India, it is no longer the primary driver of investment decisions.
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The ELSS Issue
Earlier, ELSS funds had a distinct advantage as the only equity mutual funds eligible for tax deduction under Section 80C (up to ₹1.5 lakh) under the old tax regime. This tax benefit justified the mandatory three-year lock-in.
However, investors opting for the new tax regime cannot claim any Section 80C deductions, effectively removing ELSS’s tax advantage.
Re-evaluating the lock-in: Without the tax benefit, the compulsory three-year lock-in becomes harder to justify. Investors who originally chose ELSS primarily for tax savings may now prefer other equity mutual funds that offer greater liquidity and flexibility.
Focus purely on growth: ELSS funds must now compete directly with Flexi Cap, Large Cap, and other diversified equity funds solely on performance, expense ratio, and portfolio quality. In the absence of tax incentives, ELSS no longer enjoys a structural advantage over other equity mutual funds.
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Change in Preference for Debt and Retirement Strategies
You should also consider classic retirement and debt strategies under Section 80C, such as PPF and certain bank- and NBFC-offered annuities. The interest earned and maturity amount are completely tax-free, making it appealing despite its relatively low interest rate. The minimum annual contribution of ₹500 is still required to keep the account active.
NPS (National Pension Scheme) contributions remain beneficial. Under Section 80CCD(2), the employer’s contribution to NPS is deductible separately from Section 80C, up to a specified percentage of salary (Basic + DA) within the overall limit prescribed. This remains one of the few meaningful tax-planning levers under the new regime and should be coordinated with your employer’s policy.
Strategic Planning under the New Regime
Section 115BAC requires a shift from tax-saving investments to tax-optimisation strategies.
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Comparative Analysis Every Year
In India, salaried and non-business individuals can choose between the old and new tax regimes each financial year. Therefore, an annual, detailed comparison is essential. This choice depends on whether the total deductions and exemptions available under the old regime (such as HRA, 80C, 80D, etc.) provide greater tax savings than the lower slab rates offered under the new regime. If total deductions exceed a certain threshold, the old regime may still be more advantageous.
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Putting Liquidity and Returns First
Under the new regime, there is less incentive to invest in tax-saving instruments like ELSS, as the tax deduction under Section 80C is no longer available if you opt for the new regime. This allows individuals to consider investments in more liquid options, such as non-tax-saving mutual funds or other market instruments, without being constrained by lock-ins. Investment decisions should therefore prioritise liquidity, expected returns, and alignment with financial goals rather than merely seeking tax benefits.
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Utilisation of Allowed Deductions
Most deductions are limited under the new system, but the ones that are allowed should be utilised effectively:
Standard Deduction: Salaried individuals automatically get a standard deduction of ₹75,000 from their salary income. This is included in the computation of taxable income and reduces tax liability.
NPS (Employer's Contribution): The employer’s contribution to the National Pension System (NPS) account is deductible under Section 80CCD(2). This deduction is in addition to the ₹1.5 lakh limit under Section 80C, making it an important tool for tax planning.
Interest on Let-Out Property: The interest paid on a home loan for a rented property is deductible from rental income under Section 24(b). This helps reduce taxable rental income.
Conclusion
Section 115BAC marks a significant milestone in India's tax reform journey, simplifying compliance at the expense of traditional incentives. The impact on investments is clear: the era of tax-mandated investing is receding. The discerning taxpayer must now treat tax savings as a secondary benefit to overall financial goal planning.
The annual decision between the old and new tax regimes in India requires a careful, quantitative assessment, comparing lower tax rates under the new regime with the limited deductions and exemptions available in the old regime. The key takeaway for investors is to ensure that investment decisions align primarily with financial objectives, with tax benefits considered as a secondary factor.
As tax-driven investing gives way to goal-based planning under the new tax regime, investors are increasingly looking at stable, predictable options for capital preservation.
Exploring fixed-income avenues such as Shriram Fixed Deposits can help balance portfolios, offering competitive returns, flexible tenures, and added security alongside market-linked investments.
FAQs
What is Section 115BAC?
Section 115BAC introduces a new tax regime for individuals and HUFs in India. Under this regime, income tax rates are lower, and most deductions and exemptions available under the old regime are not allowed.
How does it impact tax-saving investments?
The removal of deductions under 80C/80D, HRA, and others reduces the tax advantage of traditional tax-saving products, pushing investors toward goal-aligned investing.
Should I change my investment strategy?
The decision depends on whether your total deductions under the old regime produce greater tax savings than the lower rates under the new regime. An annual comparison is recommended.
What investments are affected?
The most affected investments and costs are ELSS mutual funds, PPF, term life insurance premiums, and health insurance premiums (80D) because they lose their deduction benefits.
How to plan taxes under 115BAC?
Tax depends on your taxable income and the relevant slab rates. Under the new regime for FY 2025-26, incomes up to ₹4 lakh are tax-free, and up to around ₹12 lakh are taxed at 0% with standard deduction and rebate.