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Tax Alert: Exemptions prescribed for taxpayers opting to be governed by New Tax Regime

30 June 2020

The Finance Act 2020 introduced an optional new tax regime for individuals and Hindu Undivided Family (HUF) taxpayers. Under this new regime, the tax rate is lower than the rate under the existing tax regime. Further, taxpayers opting to be governed under the new tax regime have to forego various deductions and exemptions, unless specifically provided. Recently, the Central Board of Direct Taxes issued a notification1 notifying the exemptions available as well as providing that the exemption available in respect of food coupons would be taxable. We, at BDO in India, have analysed and summarised this notification hereunder:

Amendment to Rule 2BB of the Income-tax Rules, 1962 (IT Rules)

A new sub-rule is introduced in Rule 2BB of the IT Rules to provide that following exemptions which are available for individuals taxpayers opting to be governed by current tax regime would be available to individuals opting for new tax regime:

  • Any allowance granted to meet the cost of travel on tour or on transfer;
  • Any allowance, whether, granted on tour or for the period of journey in connection with transfer, to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty;
  • Any allowance granted to meet the expenditure incurred on conveyance in performance of duties of an office or employment of profit. However, if free conveyance is provided by the employer, the exemption will not be available.
  • Transport allowance granted to an employee, who is blind or deaf and dumb or orthopaedically handicapped with disability of lower extremities, to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty. However, this exemption shall be limited to INR 3,200 per month.

Amendment to Perquisite Valuation Rules (i.e. Rule 3 of the IT Rules)

Where an employer provides free food and non-alcoholic beverages to its employees, the expenditure incurred towards it (less amount recovered from employees) would be treated as perquisite in the hands of employee. However, if following conditions are satisfied, such benefit shall not be taxed as perquisite:

  • Free food and non-alcoholic beverages are provided during working hours at office or business premises or through paid vouchers which are not transferable and usable only at eating joints;
  • The value of such benefit does not exceed INR 50 per meal or to tea or snacks provided during working hours or to free food and non-alcoholic beverages during working hours provided in a remote area or an offshore installation.

Where an employee opts to be governed by new tax regime, such perquisite exemption in respect of free food and non-alcoholic beverage provided by employer through paid voucher will not be available.

BDO Comments

While the CBDT has extended certain exemptions to taxpayers opting for the new tax regime, it fails to address the demand from various stakeholders to grant deductions for making investments like provident fund, insurance premium etc. (i.e. section 80C of the IT Act); medical insurance premium (i.e. section 80D of the IT Act); House Rent Allowance etc. For making the new tax regime attractive, apart from granting these basic deductions, allowing set off of House Property Loss will give impetus to individual taxpayers (since most of the individual taxpayer would have acquired property by taking home loan) to opt for new tax regime. It is imperative to note that the exemption is relevant for individual taxpayers who are into employment and not to all the individual taxpayers.

1 Notification No. 38/2020/F. No.370142/15/2020-TPL dated 26 June 2020