Income tax in India operates on the principle of progressive taxation, meaning individuals and entities pay higher rates as their income increases. For the Assessment Year 2021-22, corresponding to the Financial Year 2020-21, the government provided taxpayers with the option to select between two systems: the traditional old tax regime with exemptions and deductions, and the new tax regime introduced under Section 115BAC with reduced slab rates but limited exemptions. Understanding how these two regimes work is crucial for individuals, Hindu Undivided Families (HUFs), and other categories of taxpayers.
We focus on the tax slab rates applicable to individuals and HUFs, explaining the old regime in detail, the benefits available to senior and super senior citizens, the rebate under Section 87A, the surcharge and cess structure, and the working of the new optional regime.
Income Tax Slabs under the Old Regime for Individuals Below 60 Years
For individuals below 60 years of age, whether residents or non-residents, the tax slabs in AY 2021-22 under the old regime were divided into four ranges.
- Income up to 2,50,000 was exempt from tax liability.
- Income between 2,50,001 and 5,00,000 was taxed at 5 percent.
- Income between 5,00,001 and 10,00,000 was taxed at 20 percent.
- Income above 10,00,000 was taxed at 30 percent.
This structure ensures that taxpayers with modest income pay either no tax or a very small portion, while higher earners shoulder a larger share of the tax burden. The old regime was also attractive to many because it allowed deductions under sections like 80C for investments in provident funds and insurance, 80D for medical insurance, and exemptions such as house rent allowance.
Income Tax Slabs for Resident Senior Citizens
Senior citizens in India, defined as residents aged between 60 years and 80 years, enjoy a higher exemption limit. For AY 2021-22:
- Income up to 3,00,000 was exempt.
- Income between 3,00,001 and 5,00,000 was taxed at 5 percent.
- Income between 5,00,001 and 10,00,000 was taxed at 20 percent.
- Income above 10,00,000 was taxed at 30 percent.
This additional exemption of 50,000 compared to younger individuals reflects the government’s recognition of their financial needs, especially since many retirees rely on savings or pensions.
Income Tax Slabs for Resident Super Senior Citizens
Super senior citizens, defined as residents aged 80 years or above, have even higher relief under the old regime. Their exemption limit extends to 5,00,000. The rates applicable were:
- Income up to 5,00,000 was exempt.
- Income between 5,00,001 and 10,00,000 was taxed at 20 percent.
- Income above 10,00,000 was taxed at 30 percent.
This generous exemption ensures that many super senior citizens with modest incomes face no tax liability at all, reducing financial pressure in old age.
Additional Provisions for All Individuals under the Old Regime
All categories of individuals, whether under 60 years old, senior citizens, or super senior citizens, were subject to additional rules beyond the slab rates.
- A surcharge of 10 percent was applicable if total income exceeded 50 lakh.
- A surcharge of 15 percent applied if total income exceeded 1 crore.
- For income above 2 crore, surcharge rose to 25 percent.
- For income above 5 crore, surcharge reached 37 percent.
In addition, a health and education cess of 4 percent was charged on the sum of income tax and surcharge. This cess was directed toward funding health and education initiatives.
Rebate under Section 87A
Section 87A provided significant relief to individuals with lower taxable income. A resident individual with a taxable income up to 5,00,000 could claim a rebate equal to the actual tax liability or 12,500, whichever was lower. This provision ensured that individuals falling within this income threshold effectively had zero tax liability.
For example, if an individual earned 4,80,000, the tax payable at 5 percent on the income above 2,50,000 would have been 11,500. The rebate under Section 87A would cover this amount fully, bringing the final liability to zero.
Income Tax Slabs for HUF, AOP, BOI, and Artificial Juridical Persons under Old Regime
Hindu Undivided Families, Association of Persons, Body of Individuals, and artificial juridical persons followed the same slab rates as individuals below 60 years. Their structure was:
- Nil tax up to 2,50,000.
- 5 percent for income between 2,50,001 and 5,00,000.
- 20 percent for income between 5,00,001 and 10,00,000.
- 30 percent for income above 10,00,000.
Like individuals, they were subject to surcharge and cess provisions depending on the total income. This alignment of HUFs with individual taxation simplifies the system, as HUFs are often treated as a separate family-based unit of taxation.
The New Tax Regime under Section 115BAC for Individuals and HUFs
The Finance Act of 2020 introduced a new optional tax regime with simplified slab rates. The key feature of this regime is the lower tax rates for various income brackets, but taxpayers must give up most exemptions and deductions, such as those under Chapter VI-A, as well as standard allowances like house rent allowance.
The slab structure for AY 2021-22 under the new regime was as follows:
- Income up to 2,50,000 was exempt.
- Income between 2,50,001 and 5,00,000 was taxed at 5 percent.
- Income between 5,00,001 and 7,50,000 was taxed at 10 percent.
- Income between 7,50,001 and 10,00,000 was taxed at 15 percent.
- Income between 10,00,001 and 12,50,000 was taxed at 20 percent.
- Income between 12,50,001 and 15,00,000 was taxed at 25 percent.
- Income above 15,00,000 was taxed at 30 percent.
This regime spread out the tax burden more evenly and provided lower rates in the middle-income ranges, making it beneficial for taxpayers who did not claim multiple deductions.
Restrictions on Exemptions and Deductions in the New Regime
The new regime required taxpayers to forgo a large number of exemptions and deductions. Popular exemptions like house rent allowance, leave travel allowance, and deductions under sections 80C, 80D, and 24(b) were not available. Taxpayers had to evaluate whether the savings from deductions under the old regime outweighed the lower slab rates of the new regime.
For example, a salaried person with income of 10,00,000 but no major deductions might find the new regime more favorable due to lower rates, whereas a taxpayer claiming full deductions under 80C and 80D and also paying home loan interest might save more under the old regime.
Impact of Surcharge and Cess in the New Regime
The surcharge and cess provisions applied identically under both regimes. Income above 50 lakh attracted a surcharge starting at 10 percent and rising up to 37 percent for income above 5 crore. The health and education cess at 4 percent also remained constant. Thus, high-income earners did not see any reduction in effective tax rate by merely opting for the new system.
Choosing Between the Old and New Regimes
The choice between regimes was an important financial decision. Taxpayers were allowed to evaluate their tax liability under both systems before filing returns. Salaried taxpayers could make the choice every year, whereas individuals with business or professional income had to stick to the regime once chosen, unless they opted out permanently later.
The old regime favored taxpayers with significant investments and expenses eligible for deduction, while the new regime suited those who preferred a simplified system with fewer compliances. The decision depended on personal financial planning, savings habits, and long-term commitments such as home loans.
Illustration of Comparison
Consider an individual with an annual income of 12,00,000. Under the old regime, if the person invested 1,50,000 in eligible instruments under section 80C, paid 25,000 for health insurance under section 80D, and claimed interest on housing loan at 2,00,000, the taxable income reduced to 8,25,000. Tax at 20 percent on this amount after slab adjustments could make the old regime more beneficial.
On the other hand, if the same individual had no investments or deductions, the new regime would offer lower liability as income would be taxed progressively at reduced rates up to 30 percent above 15,00,000.
Partnership Firms Including LLPs
Partnership firms, whether registered or unregistered, and limited liability partnerships were subject to a flat tax rate in AY 2021-22.
Flat Rate of 30 Percent
The income of firms was taxed at a flat rate of 30 percent irrespective of the level of income. This meant there were no slabs like those applicable to individuals or HUFs. The flat rate system simplifies the calculation of tax liability for partnerships, ensuring that once profit is determined, a uniform rate applies across all levels of earnings.
Surcharge for Firms
If the total income of a firm exceeded 1 crore, a surcharge of 12 percent of income tax was applicable. For incomes below this threshold, no surcharge was levied.
Health and Education Cess
Over and above the income tax and surcharge, a health and education cess of 4 percent was added to the liability.
Implications for Partners
It is important to note that the remuneration or interest paid to partners is allowed as a deduction within certain limits prescribed under the Act. After these deductions, the remaining profit is taxed at the firm level at the flat 30 percent rate. The share of profit received by partners from the firm is exempt in their hands, ensuring no double taxation occurs.
Domestic Companies
Domestic companies, registered in India, had multiple options and applicable rates depending on their turnover, gross receipts, or whether they opted for specific sections like 115BA, 115BAA, or 115BAB.
Companies Opting for Section 115BA
Companies engaged in manufacturing or production activities and opting for Section 115BA were liable to pay tax at 25 percent. Certain conditions applied, including the date of incorporation and restrictions on set-off of losses.
Companies with Turnover Up to 400 Crore
Domestic companies with a turnover or gross receipts not exceeding 400 crore in Financial Year 2017-18 were taxed at 25 percent. This measure was introduced to support small and medium-sized companies by reducing their tax burden compared to larger corporations.
Companies Opting for Section 115BAA
Domestic companies opting for Section 115BAA were taxed at 22 percent. This section was introduced to promote a lower corporate tax rate in exchange for foregoing certain exemptions and incentives. Companies choosing this option had to permanently adopt it and could not switch back to the regular provisions.
Companies Opting for Section 115BAB
New manufacturing companies incorporated on or after 1 October 2019 and commencing production before 31 March 2023 could opt for Section 115BAB. Such companies enjoyed a concessional tax rate of 15 percent, provided they did not avail of specified incentives or deductions. This was one of the most competitive corporate tax rates globally and was aimed at encouraging investment in new manufacturing ventures in India.
Other Domestic Companies
Companies that did not fall under the above categories were subject to a standard tax rate of 30 percent.
Minimum Alternate Tax (MAT)
Companies were also subject to Minimum Alternate Tax provisions at 15 percent of book profit. This provision ensured that companies showing high book profits but low taxable income due to exemptions or deductions still paid a minimum level of tax.
Surcharge for Domestic Companies
A surcharge of 7 percent applied if total income exceeded 1 crore but did not exceed 10 crore. If income exceeded 10 crore, the surcharge increased to 12 percent.
Health and Education Cess
Similar to other categories, companies were also liable to pay a 4 percent health and education cess on income tax plus surcharge.
Foreign Companies
Foreign companies had different rates applicable compared to domestic companies.
Flat Tax Rate of 40 Percent
The base tax rate for foreign companies was fixed at 40 percent of income. Unlike domestic companies, no concessional slab rates or optional regimes were provided.
Surcharge for Foreign Companies
If the total income of a foreign company exceeded 1 crore but did not exceed 10 crore, a surcharge of 2 percent of income tax was levied. For incomes exceeding 10 crore, the surcharge increased to 5 percent.
Health and Education Cess
A 4 percent cess on the total of income tax and surcharge was applicable, similar to domestic companies.
Rationale for Higher Rate
The higher tax rate on foreign companies reflected the government’s approach to ensure that international entities conducting business in India contributed significantly to the exchequer. At the same time, concessional rates under tax treaties and special provisions often moderated the effective tax liability for foreign corporations.
Cooperative Societies
Cooperative societies serve important roles in agriculture, housing, credit, and other sectors. The Income Tax Act provided both an old regime and a new concessional regime under Section 115BAD for them in AY 2021-22.
Old Regime Slabs for Cooperative Societies
The slab rates for cooperative societies under the old regime were:
- Income up to 10,000 taxed at 10 percent.
- Income between 10,001 and 20,000 is taxed at 20 percent.
- Income above 20,000 taxed at 30 percent.
This slab-based system created a progressive tax structure similar to individuals but with narrower bands.
Surcharge for Cooperative Societies
If the income of a cooperative society exceeded 1 crore, a surcharge of 12 percent was applicable.
Health and Education Cess
A 4 percent cess applied on income tax and surcharge.
New Regime under Section 115BAD
From Financial Year 2020-21, cooperative societies were given an option to pay tax at a concessional rate of 22 percent, provided they did not avail of specified exemptions or deductions. If they chose this option, a 10 percent surcharge applied irrespective of income level, along with a 4 percent cess.
Comparative Benefit
Societies with significant deductions often found the old regime more beneficial, while those preferring lower rates with fewer compliances could shift to Section 115BAD. The option, once exercised, had to be applied consistently in future years.
Local Authorities
Local authorities such as municipal corporations or district boards were also liable to income tax under the Act.
Flat Rate of 30 Percent
The tax rate applicable to local authorities was a flat 30 percent of income. No slab benefit was provided.
Surcharge for Local Authorities
If total income exceeded 1 crore, a surcharge of 12 percent was applicable.
Health and Education Cess
Like other taxpayers, local authorities were also liable for the 4 percent health and education cess.
Significance of Surcharge and Cess Across Entities
Across all entities, surcharge and cess played a major role in increasing effective tax liability. For instance, a firm with taxable income of 1.5 crore would not only pay the base 30 percent but also an additional 12 percent surcharge on the tax amount, followed by 4 percent cess.
This layered structure made effective tax rates higher than nominal rates. High-income entities, especially large corporations and firms, often faced substantial effective tax rates due to surcharge increments.
Impact of Concessional Regimes
The introduction of concessional regimes like Section 115BAA for companies and Section 115BAD for cooperative societies reflected the government’s broader policy shift toward reducing headline tax rates in exchange for removing exemptions and incentives.
This simplification aimed to create a more transparent and globally competitive tax environment. Companies opting for these regimes benefited from lower rates, but they had to forgo deductions such as additional depreciation, profit-linked incentives, or investment allowances.
Global Competitiveness of Corporate Tax
The concessional rates of 22 percent for companies under Section 115BAA and 15 percent for new manufacturing units under Section 115BAB positioned India among countries with lower corporate tax rates. This policy was designed to attract foreign direct investment and promote domestic manufacturing.
By contrast, the higher rate of 40 percent for foreign companies without treaty benefits indicated a balance between attracting investment and safeguarding revenue.
Interaction with Minimum Alternate Tax
While concessional regimes exempted companies from Minimum Alternate Tax provisions, regular companies remained subject to MAT at 15 percent of book profits.
This provision ensured that companies declaring substantial profits in financial statements could not avoid tax altogether through deductions. For firms, cooperative societies, and local authorities, MAT was not applicable, highlighting the unique applicability of this provision to corporate entities.
Understanding the Concept of Surcharge
A surcharge is an additional charge levied on the amount of income tax, not on the total income itself. It is a progressive levy, targeted at high-income earners to ensure that those with greater capacity to pay contribute more to government revenues.
Applicability of Surcharge
For individuals, Hindu Undivided Families, Associations of Persons, Bodies of Individuals, and Artificial Juridical Persons, surcharge is applied at multiple levels based on income.
- If total income exceeds 50 lakh, surcharge of 10 percent of income tax is applied.
- If total income exceeds 1 crore, surcharge of 15 percent applies.
- If total income exceeds 2 crore, surcharge increases to 25 percent.
- If total income exceeds 5 crore, surcharge reaches the maximum of 37 percent.
For firms and local authorities, surcharge applies at a flat 12 percent if income exceeds 1 crore.
For domestic companies, surcharge rates are 7 percent for incomes between 1 crore and 10 crore, and 12 percent above 10 crore.
For foreign companies, surcharge rates are 2 percent if income exceeds 1 crore but remains under 10 crore, and 5 percent if income exceeds 10 crore.
For cooperative societies under the old regime, surcharge applies at 12 percent if income crosses 1 crore, whereas under Section 115BAD, surcharge is fixed at 10 percent regardless of income.
Purpose of Surcharge
The surcharge ensures that high-income groups contribute proportionately more, maintaining fairness and progressivity in taxation. While the base tax rates provide uniformity, the surcharge introduces a balancing factor that targets only those with significant incomes.
Health and Education Cess
In addition to surcharge, all categories of taxpayers are subject to a health and education cess.
Rate of Cess
The cess is fixed at 4 percent of the total income tax plus surcharge. Unlike surcharge, which is applied selectively depending on income levels, the cess is universally applicable once there is any tax liability.
Purpose of Cess
The proceeds from health and education cess are specifically earmarked for funding education and healthcare initiatives. This makes cess both a revenue-raising and welfare-oriented tool, reflecting the government’s objective of linking tax collection with social development priorities.
Impact on Tax Liability
Although cess appears small in percentage terms, its universal application means that it increases the effective tax liability for every taxpayer. Even for individuals availing rebate under Section 87A, the cess applies if there is any taxable income before rebate.
Rebate Under Section 87A
While surcharge and cess add to the burden, Section 87A provides relief to small taxpayers by reducing their effective liability.
Eligibility Criteria
The rebate is available only to resident individuals. Non-residents, firms, companies, and other entities are not eligible. Further, the rebate is allowed only if the total taxable income after deductions does not exceed 5 lakh.
Amount of Rebate
The rebate is equal to the lower of the actual income tax liability or 12,500. This ensures that individuals with taxable incomes up to 5 lakh effectively pay zero tax.
Practical Implication
Consider an individual with taxable income of 4.8 lakh. The tax liability before rebate would be 12,500 at 5 percent rate on income exceeding 2.5 lakh. Since rebate under Section 87A allows up to 12,500, the entire liability is neutralized. This provision ensures relief for low-income earners, encouraging compliance while safeguarding their income.
Interaction of Surcharge, Cess, and Rebate
The combined effect of surcharge, cess, and rebate often complicates tax computation.
Sequence of Application
First, base income tax is calculated as per slabs or flat rates.
Second, surcharge is applied on the income tax based on thresholds.
Third, health and education cess is calculated on the sum of income tax plus surcharge.
Finally, rebate under Section 87A is adjusted against the tax liability, subject to conditions.
Example for Individuals
Suppose a resident individual has a taxable income of 55 lakh under the old regime.
The tax liability before surcharge is calculated based on slabs, which would come to 14,62,500.
Surcharge of 10 percent applies since income exceeds 50 lakh but not 1 crore, adding 1,46,250.
Cess of 4 percent applies on 16,08,750, giving 64,350.
Total liability equals 16,73,100.
This illustrates how surcharge and cess significantly increase effective tax rates at higher income levels.
Example for Cooperative Societies under Section 115BAD
Suppose a cooperative society opts for Section 115BAD and has taxable income of 3 crore.
Base tax at 22 percent amounts to 66 lakh.
Surcharge at 10 percent applies, adding 6.6 lakh.
Cess at 4 percent of 72.6 lakh equals 2.9 lakh approximately.
Total liability comes to about 75.5 lakh.
Comparative Burden Between Old and New Regimes
The new regime under Section 115BAC for individuals and Section 115BAD for cooperative societies changes the structure of taxation.
New Regime for Individuals
Under Section 115BAC, individuals have multiple tax brackets with reduced rates but must forgo deductions like standard deduction, housing loan interest, and Section 80C investments. While surcharge and cess still apply, the overall liability may reduce for those not claiming large deductions.
For example, a salaried individual with no significant deductions and an income of 12 lakh may benefit from the new regime. On the other hand, someone with high housing loan interest and provident fund contributions may find the old regime more favorable.
New Regime for Cooperative Societies
Section 115BAD offered a flat 22 percent rate with a fixed surcharge of 10 percent, simplifying compliance. Societies with lower incomes and fewer deductions benefited, while larger societies with available deductions sometimes preferred the old regime.
Companies and Concessional Options
The introduction of Sections 115BAA and 115BAB for domestic companies created similar choices. Companies opting for these concessional rates were exempt from MAT and subject only to surcharge and cess, resulting in competitive effective tax rates compared to global standards.
Effective Tax Rate Calculations
It is essential to distinguish between nominal tax rates and effective tax rates.
For High-Income Individuals
A taxpayer with income exceeding 5 crore could face a nominal maximum rate of 30 percent. With surcharge at 37 percent and cess at 4 percent, the effective rate crossed 42 percent.
For Firms
While the flat rate for firms was 30 percent, after surcharge of 12 percent and cess, the effective rate for incomes above 1 crore rose to about 34.9 percent.
For Domestic Companies under 115BAA
Base rate of 22 percent plus surcharge of 10 percent and cess of 4 percent gave an effective rate of about 25.17 percent.
For New Manufacturing Companies under 115BAB
Base rate of 15 percent plus surcharge of 10 percent and cess of 4 percent gave an effective rate of about 17.16 percent, one of the lowest globally.
Policy Perspective
The structure of surcharge and cess demonstrates the balancing act of revenue collection and equity. On one hand, concessional regimes encourage investment and reduce corporate burden. On the other hand, high surcharge rates on ultra-rich individuals ensure redistribution and maintain progressivity.
Criticism of High Surcharge
The steep surcharge rates, especially the 37 percent on individuals with income exceeding 5 crore, attracted criticism from investors and business leaders. Concerns were raised that it discouraged entrepreneurship and could drive investment out of the country.
Defense of High Surcharge
On the other side, policymakers defended the surcharge as a necessary measure to maintain equity in taxation, especially at a time when public spending on healthcare and welfare needed to be expanded.
Role of Rebate
The rebate under Section 87A served as a counterbalance by protecting low-income groups from any liability, ensuring that taxation remained inclusive despite heavy surcharges at the top end.
Significance of Cess in Social Policy
Unlike surcharge, which goes to general revenue, cess proceeds are earmarked. The health and education cess is specifically designed to support schools, higher education, and healthcare programs. This earmarking provides a direct link between taxpayer contributions and social welfare, enhancing public trust in taxation.
Broader Impact
By ensuring that every taxpayer contributes to education and health, cess plays a role in nation-building. Even though it increases liability slightly, the visible connection between tax contribution and social benefits provides a sense of accountability and transparency.
Conclusion
The income tax framework for Assessment Year 2021-22 (Financial Year 2020-21) presents a multi-layered system that blends progressivity, inclusivity, and flexibility. Across individuals, Hindu Undivided Families, cooperative societies, firms, companies, and local authorities, the system provides a mixture of slab-based structures, flat rates, concessional regimes, and additional levies.
For individuals, the choice between the old regime with its wide range of deductions and exemptions and the new simplified regime under Section 115BAC marks a shift toward flexibility. Taxpayers can align their choice with their financial planning, whether it is investments in savings instruments or the preference for a lower rate without compliance complexity. Senior citizens and super senior citizens enjoy higher basic exemptions, reflecting sensitivity to their needs.
Firms, cooperative societies, and local authorities are taxed at fixed rates, ensuring predictability, while the introduction of Section 115BAD for cooperative societies provides them with a modern concessional option. Domestic companies are given an even broader set of alternatives through Sections 115BA, 115BAA, and 115BAB, which reduce effective rates and encourage investment, especially in new manufacturing. This competitive positioning aligns Indian corporate taxation with global benchmarks.
The role of surcharge and health and education cess cannot be overlooked. They serve as instruments for equity and social welfare, ensuring that those with higher incomes bear a greater share of the tax burden while guaranteeing that contributions toward education and health are secured. At the same time, the rebate under Section 87A protects small taxpayers from liability, creating balance within the framework.
Taken together, the system reflects the government’s dual priorities: mobilizing resources for development and welfare while providing taxpayers with choices and relief measures. The interplay of base rates, concessional options, surcharges, cess, and rebates demonstrates the complexity of modern taxation but also highlights its adaptability.
Ultimately, the income tax provisions for AY 2021-22 embody a vision of inclusive growth, fiscal responsibility, and progressive contribution. They encourage compliance, safeguard the vulnerable, and position India competitively in the global economy, all while ensuring that taxation continues to serve as both a tool of revenue generation and a means of social development.