Structuring Reimbursements & Payroll under Section 115BAC (1A) – FY 2025–26

Introduction

With the New Tax Regime under Section 115BAC(1A) becoming the default regime from FY 2023–24, it is imperative for employers and payroll teams to align their salary structures and HR policies with its stipulations. While most exemptions/deductions are not allowed, certain reimbursements continue to be tax-exempt, subject to strict conditions.

This guidance note provides:

1. Final positions on tax-exempt components under Section 115BAC(1A)

2. HR Policy Format for Allowable Reimbursements

3. Employee Declaration Format

4. Payroll Structuring Matrix: Old vs New Regime

Eligibility of Common Pay Components Under Section 115BAC(1A)

Component	Exempt Under 115BAC(1A)?	Legal Basis / Interpretation	Conditions
Fuel & Maintenance Allowance	❌ Not Exempt	Not covered under Sec. 10 exemptions allowed in 115BAC(1A)	Fully taxable unless reimbursement linked to company-owned car under Rule 3
Food Allowance / Meal Coupons	✅ Exempt (in kind only)	Allowed as non-cash perquisite, ₹50/meal as per CBDT Circular 15/2021	Should be through voucher/card, not in cash. Working hours only.
NPS - Employer Contribution	✅ Allowed	Deduction under Section 80CCD(2) specifically retained under 115BAC(2)(ii)	Upto 10% of salary (basic + DA)
NPS - Employee Contribution	❌ Not Allowed	Section 80CCD(1)/(1B) is not available under 115BAC	Fully taxable in New Regime
Telephone/Internet (Reimbursement)	✅ Allowed	Reimbursement of actual official expenses is not income per Rule 3/Employer Circulars	Must be supported by bills + declaration of official use
Driver Allowance	❌ Not Exempt	Perquisite under Rule 3 unless driver provided by employer	If employer-owned car with driver, perquisite valuation applies
Books, Newspaper & Periodicals	✅ Allowed (reimbursement)	Not taxable if for official use & reimbursed against bills	Personal allowance not allowed
Uniform Allowance	✅ Allowed (for job-related use only)	Covered under Rule 3 if uniforms are required for official duties	Not applicable for personal clothing
Conveyance Allowance	✅ Allowed if for official duty	As per CBDT Circular 15/2021, reimbursement for official travel is not considered income	Must not be fixed monthly amount; needs trip records or log approval
Children Education & Hostel Allowance	❌ Not Exempt	Section 10(14) read with Rule 2BB excluded from 115BAC benefits	Fully taxable
Standard Deduction ₹50,000	✅ Allowed	Retained via Finance Act, 2023 under 115BAC	Automatically applied
Professional Tax	✅ Allowed	Section 16(iii) retained	Deducted by employer

HR POLICY FORMAT – ALLOWABLE REIMBURSEMENTS UNDER SECTION 115BAC(1A)

Company Name: The Smart HR Solutions Private Limited
Policy Title: Reimbursement Policy under New Tax Regime
Effective From: 01.04.2025
Applicability: All employees who have opted for taxation under Section 115BAC(1A)

✔️ Allowable Reimbursement Heads

Category	Allowed (Y/N)	Conditions	Limit
Telephone / Internet	Yes	Bills + Declaration of official use	Actual
Books / Journals	Yes	Must be for professional/official purpose	Actual
Uniform (for work)	Yes	Only job-linked uniforms	Actual
Conveyance (official)	Yes	Must maintain travel log or approvals	Actual
Meal Coupons (non-cash)	Yes	In-kind via card/vouchers, up to ₹50 per meal	₹50 per meal

❌ Disallowed under 115BAC(1A)

• HRA

• LTA

• Education Allowance

• Driver Allowance

• Fuel Allowance

• Medical Reimbursement

• Entertainment Allowance

EMPLOYEE DECLARATION FORMAT

[Company Letterhead]
Declaration for Official Reimbursements – FY 2025–26

Name: ___________
Employee ID: ___________
PAN: ___________
Department: ___________
Tax Regime Chosen: ⬜ 115BAC (New Regime)

Expense Type	Bill Date	Amount (₹)	Purpose / Remarks

Declaration
I certify the above expenses are incurred wholly for official purposes and not for personal benefit. Original bills and supporting documents are attached.

Signature: ___________
Manager’s Approval: ___________
HR Verification: ___________

PAYROLL STRUCTURING MATRIX – OLD VS NEW REGIME

Component	Old Regime	New Regime (115BAC)	Remarks
Basic Salary	Taxable	Taxable	Common in both
HRA	✅ Exempt u/s 10(13A)	❌ Not Exempt	Fully taxable under new regime
Standard Deduction	✅ ₹50,000	✅ ₹50,000	Available in both regimes
LTA	✅ Exempt (conditions apply)	❌ Not Exempt	Not available under new regime
NPS – Employee Contribution	✅ 80CCD(1)/(1B)	❌ Not allowed	Only employer contribution allowed
NPS – Employer Contribution	✅ 80CCD(2)	✅ Allowed	Up to 10% of salary
Fuel / Driver Allowance	✅ With Rule 3 conditions	❌ Fully taxable	Unless official car provided
Children’s Education Allow.	✅ ₹100 / ₹300 per month	❌ Not Exempt	Fully taxable under 115BAC
Reimbursed Telephone Bills	✅ Not taxable	✅ Not taxable (official only)	Subject to declaration and bills
Food Coupons (non-cash)	✅ Exempt ₹50/meal	✅ Exempt ₹50/meal	Only in-kind format (Sodexo, etc.)

Conclusion

Section 115BAC (1A) allows for certain reimbursements and perquisites to remain non-taxable only when paid strictly as reimbursement against bills and not as fixed allowances.

Employers must:

• Review and redesign salary structures.

• Issue a clear HR reimbursement policy.

• Ensure monthly employee declarations with backup bills.

• Maintain robust documentation to justify non-taxability during assessments.

Tax-Exempt Salary Components Under New Regime – Section 115BAC(1A): A Comprehensive Legal Note for FY 2025–26

In tax, as in surgery, precision saves pain.”
— A professional compliance note for employers and payroll heads

Background

Effective AY 2024–25 onwards, Section 115BAC(1A) is the default tax regime for all individuals (except those with business income opting out). This regime provides reduced slab rates but withdraws most exemptions and deductions available under the old regime.

Employers must carefully structure salary components to avoid erroneous TDS calculations, ensure compliance, and minimise disputes.

Governing Law

• Section 115BAC(1A): Specifies concessional tax rates and withdrawal of exemptions.

• Rule 2BB of Income Tax Rules: Lists allowances exempt under Section 10(14).

• Rule 3: Specifies valuation rules for perquisites.

• CBDT Circulars and case law: Provide clarification on exemptions and reimbursements.

Allowed Exemptions Under New Regime (Section 115BAC)

Component	Allowed	Legal Reference	Conditions / Remarks
Employer NPS Contribution	✅ Allowed	Sec. 80CCD(2)	Max 10% of Salary (Basic + DA). Exempt u/s 80CCD(2) even in new regime.
Standard Deduction	✅ Allowed	Sec. 16(ia)	₹50,000 allowed for salaried employees under Sec. 115BAC(1A) from AY 2024–25.
Professional Tax	✅ Allowed	Sec. 16(iii)	Deductible even in new regime.
Transport Allowance for Disabled	✅ Allowed	Rule 2BB(2)	Max ₹3,200/month. Only for orthopedically handicapped, blind, or disabled.
Conveyance Allowance (Official Duty)	✅ Allowed	Rule 2BB(1)(a)	Reimbursed for official travel. Must be actual expense & documented.
Daily Allowance (During Travel)	✅ Allowed	Rule 2BB(1)(c)	Must be for official travel, with documentation.
Uniform Allowance	✅ Conditionally Allowed	Rule 2BB(1)(f)	Only for distinctive uniform; casual wear not allowed. Must be compulsory & job-linked.
Books, Periodicals (Official Use)	✅ Conditionally Allowed	Based on Rule 2BB/ Reimbursement principle	Allowed if for official use & reimbursed against proof. Cannot be fixed allowance.
Telephone & Internet (Official)	✅ Conditionally Allowed	Rule 3(7)(ix) & Circulars	Must be provided as facility or reimbursed with usage declaration. Not a flat allowance.
Meal Coupons / Food Vouchers	✅ Conditionally Allowed	Rule 3(7)(iii)	Max ₹50/meal. Must be electronic, non-transferable. Cash not allowed. Use restricted to working hours.
Children Education Allowance	❌ Not Allowed	Withdrawn u/s 10(14)	Not permitted under new regime. Was earlier ₹100/child/month.
Hostel Allowance	❌ Not Allowed	Withdrawn u/s 10(14)	Earlier ₹300/child/month. Withdrawn under new regime.
Fuel & Maintenance Allowance	❌ Not Allowed	Rule 3(2)	Fully taxable unless car is owned/leased by employer.
Driver Allowance	❌ Not Allowed	Rule 3(2)	Taxable unless provided as perquisite with company car.
Other Allowances (Medical, LTA, HRA, etc.)	❌ Not Allowed	Section 10(13A), 10(14) Withdrawn	All such exemptions withdrawn. No relief under new regime.

Interpretations & Key Legal Clarifications

1. Reimbursements vs Allowances – The Deciding Factor

• Allowances = Fixed sum = Taxable under 115BAC.

• Reimbursements = Against bills for official use = May be exempt, if not personal in nature.

• CBDT Circular No. 15/2001: Emphasises business-linked reimbursements are not income.

✅ Actionable: Maintain internal expense policies and employee declarations for reimbursements.

2. Telephone & Internet: Facility or Perquisite?

• If provided by employer directly (as facility), not taxable per Rule 3(7)(ix).

• If reimbursed, require:

  • Usage declaration.

  • Proof of payment.

  • Policy stating official use.

✅ Better to issue corporate connections billed to company directly.

3. Meal Coupons / Food Vouchers: Electronic & Capped

• ₹50 per meal allowed, per Rule 3(7)(iii).

• Must be:

  • In electronic/coupon form.

  • Not in cash.

  • Used within working hours only.

⚠️ Company cafeteria subsidies are also covered if invoiced per meal.

4. Uniform Allowance: Functional Uniforms Only

• Exemption allowed only for specific job-linked attire (e.g., police, security, hospital).

• “Smart Casuals” or business formals not allowed unless part of a uniform code with company branding.

✅ Internal policy must define job roles needing uniform.

5. Books & Periodicals: Functional Reimbursement

• Tax-free only if reimbursed for professional/official use.

• Must not be a fixed allowance.

• No exemption for general reading or personal development books.

6. Car, Driver & Fuel: Fully Taxable Unless Owned by Employer

• Any allowance given to employee directly is taxable.

• If car is owned/leased by company, perquisite valuation rules apply (Rule 3(2)).

🚨 Caution for Employers

• Misclassification risks: Naming a component "Reimbursement" does not make it exempt unless documented.

• Audit exposure: Non-documented reimbursements may be taxed during payroll scrutiny.

• Policy harmonization: HR policies must align with tax rules. Salary slips, declarations, and Form 12BB should reflect correct classification.

Employer's Action Checklist

✅ To-Do	Description
📝 Update Salary Structures	Remove disallowed allowances from standard CTC for 115BAC employees.
📃 Draft Reimbursement Policy	Cover telecom, conveyance, books, and official expenses.
🧾 Collect Proofs & Declarations	Especially for reimbursements, NPS, uniform use.
📁 Maintain Supporting Documents	Bills, logs, medical certificates (where needed).
🧠 Train HR/Payroll Teams	On distinction between perquisites, allowances & reimbursements.

Final Word

The new regime under Section 115BAC(1A) requires greater discipline in payroll structuring. While exemptions are restricted, official duty-linked reimbursements and specific components backed by law are still available.

The key is accurate classification, documentation, and conservative interpretation to avoid risk during assessments and audits.

“Compliant salary structuring is not just a payroll task; it’s a tax risk management strategy.”

Unlocking Tax Efficiency and Secure Retirement - Guide to NPS Contributions under the New Tax Regime

A penny saved is a penny earned, but a penny wisely invested is a future secured.

1. Introduction: NPS as a Tax-Saving Tool under the New Tax Regime

With the introduction of the New Tax Regime in Financial Year 2020-21, the government provided taxpayers with an alternative tax structure. This regime offers lower tax rates but eliminates most exemptions and deductions available under the Old Regime. Taxpayers can choose between the Old Tax Regime, which allows deductions like HRA, LTA, and 80C, or the New Regime, which simplifies taxation but with fewer options for tax-saving deductions.

As the New Tax Regime continues for the Assessment Year 2025-26 (FY 2024-25), employees and employers can utilize various methods to maximize tax savings. Among the tax-saving tools, the National Pension Scheme (NPS) stands out as a highly advantageous option. It offers both tax deductions and long-term retirement savings benefits.

Employers can leverage NPS contributions to help employees save on taxes while offering a long-term financial benefit. Below, we’ll explore how employers can contribute to NPS and how salary restructuring can maximize tax savings under the New Tax Regime.

2. NPS Tax Benefits under the New Regime: A Breakdown

The National Pension Scheme (NPS) is a government-backed retirement savings scheme that offers significant tax benefits under both the Old and New Regimes. Here’s a quick overview of the tax benefits available under the NPS:

A. Employee Contributions: Section 80CCD(1B)

• Under the New Tax Regime, employees can make voluntary contributions to the NPS and claim a deduction of up to ₹50,000 under Section 80CCD(1B). This amount is over and above the ₹1.5 lakh limit for Section 80C deductions.

• This deduction is not available under the Old Regime if an employee opts for the New Regime tax slabs.

B. Employer Contributions: Section 80CCD(2)

• Employers can contribute directly to the employee’s NPS account under Section 80CCD(2), with no upper limit. However, it is capped at 10% of the employee's basic salary + dearness allowance (DA).

• Employer contributions to NPS are tax-free for the employee and can be claimed as a deduction by the employer, thus reducing the taxable income of both parties.

3. How Employers Can Facilitate NPS Contributions through Salary Structuring

Employers have several ways to incorporate NPS contributions into the salary structure, benefiting both the employer and the employee. Below are the main ways to structure salary components for tax savings:

A. Employer’s Direct Contribution to NPS (Section 80CCD(2))

• Employers can directly contribute to the NPS on behalf of employees. The employer can contribute up to 10% of the employee's basic salary + DA, and this contribution is tax-exempt for the employee.

• Tax Benefit for Employer: The employer’s contribution is tax-deductible, thus reducing the employer's taxable income.

• Example:

  • Suppose an employee has a basic salary of ₹12,00,000. The employer can contribute 10% of this (₹1,20,000) to the employee’s NPS account.

  • This ₹1,20,000 will be tax-free for the employee and can be claimed as a deduction under Section 80CCD(2).

B. Employee’s Contribution through Salary Restructuring (Section 80CCD(1B))

Employers can restructure the salary to include NPS contributions for tax-saving purposes. This can be a strategic method for employees to make voluntary contributions to the NPS while ensuring they benefit from tax deductions.

1. Salary Components: Employers can restructure the basic salary or fixed monthly salary to allow the employee to contribute to the NPS.

2. Employee Contributions: Employees can contribute directly from their salary under Section 80CCD(1B). They can claim a deduction of up to ₹50,000 for the contributions they make to NPS, reducing their taxable income.

• Example:

  • An employee’s basic salary is ₹6,00,000. The employer allows the employee to contribute ₹50,000 to the NPS from their salary.

  • This ₹50,000 can be claimed under Section 80CCD(1B), over and above the ₹1.5 lakh limit under Section 80C.

C. Combination of Employer and Employee Contributions

Employers can also contribute to the NPS while allowing the employee to make their own contribution. This combination can be structured so that both parties receive maximum tax benefits.

• Example:

  • Suppose an employee has a basic salary of ₹8,00,000.

  • The employer can contribute 10% of the basic salary (₹80,000) to NPS under Section 80CCD(2).

  • The employee can also contribute ₹50,000 under Section 80CCD(1B).

  • This brings the total contribution to ₹1,30,000, all of which will help reduce the employee’s taxable income.

4. Benefits of NPS for Both Employers and Employees

A. Benefits for Employers

1. Tax Deduction for Employer: Employer contributions to NPS are deductible from the company’s taxable income under Section 80CCD(2).

2. Attracts & Retains Talent: Offering NPS contributions can make the company’s compensation package more attractive, especially for employees seeking long-term retirement planning.

3. Reduced Payroll Taxes: By contributing to NPS, employers reduce their own payroll tax liabilities.

B. Benefits for Employees

1. Tax Savings: Employees benefit from tax deductions on both voluntary contributions under Section 80CCD(1B) and employer contributions under Section 80CCD(2).

2. Retirement Corpus: Employees accumulate a pension corpus that they can access post-retirement, offering long-term financial security.

3. Portability: The NPS account is portable, meaning employees can transfer the corpus from one employer to another, ensuring continuity in their retirement savings.

5. Strategic Tips for Employers and Employees

A. For Employers:

• Employers should design their salary structure in a way that includes NPS contributions to maximize both tax savings and retirement benefits.

• The employer’s contribution should be carefully calculated to stay within the 10% limit of the employee's basic salary + DA.

• Employers can offer the option of contributing more to NPS on behalf of the employee, potentially enhancing the retention factor.

B. For Employees:

• Employees should actively opt-in for voluntary NPS contributions under Section 80CCD(1B), as it offers a significant opportunity for additional tax savings.

• Regular contributions to the NPS not only save taxes but also build a substantial retirement corpus, providing security in the post-retirement years.

6. Conclusion: Maximizing Tax Savings through NPS

The National Pension Scheme (NPS) is one of the most effective tools for both tax savings and retirement planning. Whether through employer contributions or salary restructuring, employees and employers can take full advantage of the tax benefits provided by the government.

Employers who incorporate NPS contributions as part of their salary structure offer a valuable benefit to employees, helping them save on taxes now while securing their future retirement. This approach not only enhances employee satisfaction but also helps employers lower their tax liabilities.

By strategically using NPS, both employers and employees can benefit from long-term financial planning while simultaneously enjoying immediate tax benefits.

"The future belongs to those who plan for it today."

Navigating the New Income Tax Regime: A Comprehensive Guide for Employers and Employees in FY 2025-26

"The key to financial success lies in making informed decisions; understanding your options is the first step."

As we approach the new financial year, taxpayers face an important decision: whether to stick with the old tax regime or opt for the newly updated tax regime, effective from April 1, 2025. The Union Budget 2025 has made substantial changes, particularly benefiting salaried individuals and employers. This blog aims to provide a detailed, analytical comparison of the old and new tax regimes, explore the deductions available, and offer key insights on salary restructuring to help employees maximize their tax benefits.

Understanding the Tax Regimes

Under India's current tax system, taxpayers are presented with two options:

1. Old Tax Regime: Allows a wide range of deductions and exemptions, which help reduce taxable income, such as Section 80C, HRA, LTA, and others.

2. New Tax Regime: Provides lower tax rates but eliminates most deductions and exemptions. It aims for simplicity and ease of filing.

For the financial year 2025-26, taxpayers will need to choose their preferred tax regime before April 30, 2025. This decision is crucial for optimizing tax liabilities.

Key Features of the New Tax Regime (2025-26)

The new tax regime was designed to provide a simpler tax structure with lower tax rates. The main features for FY 2025-26 include:

1. No Tax up to ₹12 Lakh: A significant shift in the new regime allows taxpayers earning up to ₹12 lakh to pay no tax, offering substantial relief to middle-income earners.

2. Lower Tax Rates: The tax slabs have been reduced, making it an attractive option for those with lower to mid-level income.

3. Standard Deduction: Salaried individuals can claim a ₹75,000 standard deduction in the new regime. This simplifies tax filing for those without substantial deductions to claim.

4. Employer Contributions to NPS: Contributions made by the employer to the National Pension Scheme (NPS) are eligible for deduction, further enhancing the attractiveness of the new regime.

5. No Deductions on HRA, LTA, 80C, etc.: The new regime eliminates a variety of deductions available under the old regime, making it suitable for those who do not have substantial eligible expenses to claim.

Deductions in the New Tax Regime (2025-26)

The new tax regime offers a simpler, more straightforward tax filing process. Here are the deductions you can claim under the new regime:

1. Standard Deduction:

   • Salaried individuals can claim a ₹75,000 standard deduction under the new regime for FY 2025-26.

   • This is applicable only for salary income and simplifies the tax computation process for individuals.

2. Employer Contributions to NPS:

   • Employer contributions to the NPS are deductible under Section 80CCD(2), even in the new regime.

   • This can significantly benefit employees looking to save for retirement, as these contributions reduce taxable income.

3. Family Pension:

   • For those receiving family pension, a ₹25,000 standard deduction is available under the new tax regime (higher than the old regime).

4. Gifts:

   • Gifts up to ₹50,000 received from non-relatives are exempt from tax, aligning with both regimes.

5. Employer Reimbursements:

   • Transport Allowance, Conveyance Allowance, and other similar reimbursements remain exempt under the new regime.

Deductions Not Available under the New Tax Regime

While the new tax regime offers simplicity and lower rates, it eliminates several deductions available under the old regime, such as:

1. Section 80C: No deductions for investments in PPF, EPF, life insurance premiums, etc.

2. House Rent Allowance (HRA): Not allowed under the new regime.

3. Leave Travel Allowance (LTA): No deductions for travel expenses under the new tax regime.

4. Health Insurance Premiums (Section 80D): The new regime does not allow for deductions for health insurance premiums.

5. Interest on Home Loan for Self-Occupied Property: Section 24 deductions are not available under the new regime for self-occupied properties.

6. Additional Depreciation: Section 32(1)(iia) is not applicable in the new tax regime.

Key Decision-Making Factors: Which Regime to Choose?

Choosing the right tax regime for FY 2025-26 depends on your income profile, available deductions, and preferences. Here are some key factors to consider:

1. Deductions and Exemptions

• If you regularly claim HRA, LTA, 80C, or 80D, the old tax regime might be a better choice as it allows these deductions.

• If you don't have significant expenses to claim and prefer simpler tax filing, the new regime could be more beneficial.

2. Tax Simplicity

• For those who prefer a hassle-free filing experience and have minimal tax-saving investments, the new regime offers a straightforward approach with lower tax rates.

3. Salary Structure Considerations

Employers can assist employees by restructuring salary components to maximize tax savings, especially when opting for the old regime. Here’s how:

• Opting for HRA: Employees residing in rented accommodations can structure their salary to include House Rent Allowance (HRA), thereby reducing their taxable income.

• NPS Contributions: Employers can structure salary packages to include higher NPS contributions, which are deductible under both tax regimes. These contributions are particularly valuable as they offer long-term retirement benefits and reduce taxable income.

4. Income Levels

• If you are earning up to ₹12 lakh annually, the new regime offers a tax exemption, making it an attractive option. For those with higher incomes, the old regime may still offer better tax savings through deductions.

Salary Structuring Tips for Employers to Maximize Tax Savings

Employers can play a key role in helping employees optimize their tax liabilities by structuring salary components strategically. Here’s how:

1. House Rent Allowance (HRA):

   • For employees residing in rented homes, HRA can be a significant tax-saving component, especially in the old tax regime.

   • For the new tax regime, HRA cannot be claimed, but it can still be factored into salary planning for employees opting for the old regime.

2. National Pension Scheme (NPS):

   • Employers can contribute to an NPS account for employees under Section 80CCD(2), which will be deductible under both tax regimes.

   • Salary restructuring can include higher NPS contributions to maximize deductions under the old regime.

3. Special Allowances and Reimbursements:

   • Employers can provide tax-exempt allowances such as Conveyance Allowance, Special Allowance for Children’s Education, and Medical Reimbursement to employees opting for the old tax regime.

4. Standard Deduction:

   • Employees can avail of the ₹75,000 standard deduction in the new regime for salary income, but they will need to ensure their salary structure is aligned to maximize this benefit.

Conclusion: Make an Informed Choice

Choosing between the old and new tax regimes depends on multiple factors, including available deductions, your income level, and whether you prefer a simpler tax structure or are willing to engage in strategic planning for tax savings.

Tip: To make an informed decision, calculate your potential tax liability under both regimes using online tax calculators and factor in your salary structure, available deductions, and long-term financial goals. This will help you make the best choice for FY 2025-26, ensuring both tax efficiency and financial growth.

"The best time to start planning your tax strategy is today—your future self will thank you for it."

CBDT Notification No. 38/2025: Strengthening Regulatory Compliance and Its Impact on Business Deductions

On 23rd April 2025, the Ministry of Finance issued Notification No. 38/2025, under the authority of the Central Board of Direct Taxes (CBDT). This notification restricts the deductibility of business expenses related to the settlement of regulatory violations under certain key laws, aimed at reinforcing compliance and ensuring that businesses cannot offset the financial impact of such settlements by claiming them as business deductions. This regulatory update has significant implications for businesses involved in the capital markets, securities regulations, and competition law.

Understanding Section 37(1) and Its Legal Context

Section 37(1) of the Income-tax Act, 1961 allows businesses to claim deductions for expenses incurred wholly and exclusively for business or profession. However, the section includes key exclusions, such as those related to illegal activities or those incurred in violation of law.

• Explanation 1 and 3 under Section 37(1) explicitly restrict the deduction of expenses incurred for illegal purposes or in contravention of any law.

• Clause (iv) of Explanation 3 empowers the Central Government to issue notifications, specifying laws under which expenses related to settlement of regulatory violations will not be eligible for tax deductions.

The Impact of Notification No. 38/2025

In a move to further tighten compliance, Notification No. 38/2025 has been issued, specifying that settlement costs arising from violations or default under the following acts will not be allowed as business deductions:

• Securities and Exchange Board of India Act, 1992 (SEBI Act)

• Securities Contracts (Regulation) Act, 1956

• Depositories Act, 1996

• Competition Act, 2002

This means that any expenditure incurred in settling proceedings related to contraventions of the above laws will now be non-deductible for tax purposes.

Key Implications for Businesses

1. Non-Deductibility of Settlement Costs: The most immediate impact of this notification is the disallowance of deductions for any expenses incurred in the settlement of violations under these specific regulatory frameworks. Businesses involved in such settlements will no longer be able to claim these costs as business expenses, leading to higher taxable income and consequently, higher tax liabilities.

2. Stronger Incentive for Compliance: By making settlement costs non-deductible, the government aims to discourage non-compliance and the treatment of regulatory fines as routine business expenses. This places a stronger emphasis on preventive compliance measures, as companies now bear the full financial consequences of regulatory breaches.

3. Legal and Tax Strategy Adjustments: Companies operating in regulated sectors such as capital markets, competition law, and securities trading must now factor in the non-deductibility of such expenses in their tax projections. This could significantly affect tax planning strategies, and businesses must review their risk management frameworks to avoid costly regulatory violations.

Strategic Considerations for Businesses

1. Revised Tax Planning: With settlement expenses now explicitly non-deductible, businesses must adjust their tax planning strategies to account for the additional tax burden. Companies should revise their taxable income projections and ensure that they are prepared for the higher effective tax rates arising from these changes.

2. Strengthening Compliance Frameworks: To avoid incurring non-deductible settlement costs, companies must prioritize regulatory compliance and risk management. This means enhancing internal controls and proactively adhering to the SEBI Act, Competition Act, and other applicable laws to mitigate the risk of violations that could result in settlements or penalties.

3. Proactive Risk Management: This notification underscores the need for businesses to focus on compliance and regulatory adherence, ensuring that their operations remain in line with legal frameworks to avoid unnecessary costs. Companies must reassess their internal processes, keeping a sharp focus on avoiding violations and penalties that cannot be offset by tax deductions.

Conclusion

CBDT Notification No. 38/2025 marks a significant shift towards reinforcing legal compliance by eliminating the possibility of tax deductions for settlement costs related to regulatory violations. This move aligns with the government's broader goal of promoting integrity and adherence to regulatory norms within sectors governed by securities and competition laws.

For businesses, this change is a call to action: companies in regulated industries must prioritize compliance and refine their risk management practices to minimize the possibility of violating laws. This update serves as a reminder that businesses can no longer treat regulatory fines and settlement costs as a routine part of their business expenditure—they must bear the full financial impact.

CBDT Notifies TCS on High-Value Luxury Goods under Section 206C(1F)

The Central Board of Direct Taxes (CBDT), vide Notification No. G.S.R. 252(E) dated 22nd April 2025, has brought ten categories of luxury goods under the ambit of Tax Collected at Source (TCS) under Section 206C(1F) of the Income-tax Act, 1961. This has been done through the Income-tax (11th Amendment) Rules, 2025, with immediate effect.

This move is aligned with the Government’s policy of monitoring high-value discretionary spending and widening the tax net.

Legal Provision – Section 206C(1F)

Section 206C(1F) mandates collection of tax at source @1% by the seller if the sale consideration received from a buyer for a notified item exceeds ₹10,00,000 per transaction. In the absence of PAN/Aadhaar, Section 206CC will apply, increasing the TCS rate to 5%.

Earlier applicable only to motor vehicles, the list of notified goods has now been expanded.

Newly Notified Goods under Form 27EQ

Sl. No.	Luxury Good Category	Code	Threshold (₹)	TCS Rate (with PAN)	TCS Rate (w/o PAN)
1	Wristwatch	6CMA	10,00,000	1%	5%
2	Art pieces (e.g., painting, sculpture, antique)	6CMB	10,00,000	1%	5%
3	Collectibles (e.g., coins, stamps)	6CMC	10,00,000	1%	5%
4	Yacht, canoe, rowing boat, helicopter	6CMD	10,00,000	1%	5%
5	Sunglasses (per pair)	6CME	10,00,000	1%	5%
6	Handbag, purse	6CMF	10,00,000	1%	5%
7	Shoes (per pair)	6CMG	10,00,000	1%	5%
8	Sportswear or equipment (e.g., golf kit, ski-wear)	6CMH	10,00,000	1%	5%
9	Home theatre system	6CMI	10,00,000	1%	5%
10	Horse (used for horse racing or polo)	6CMJ	10,00,000	1%	5%

TCS is applicable even when goods are purchased for personal use.

Practical & Compliance Insights

• The ₹10 lakh threshold applies per transaction, per item. Splitting bills may not prevent TCS applicability.

• TCS is collected at the time of receipt of consideration.

• Applicable to sellers in India, including online and offline retailers, auctioneers, and private dealers.

• Buyers must ensure PAN/Aadhaar is provided to avoid higher deduction.

Regulatory References

• Notification No. G.S.R. 252(E), dated 22nd April 2025

• Legal Authority: Section 206C(1F), read with Section 295

• Form Amended: Form 27EQ – Notes to Annexure

• Effective Date: From date of publication in Official Gazette

• Issued by: Ministry of Finance, CBDT

• F. No.: 370142/11/2025-TPL

Conclusion

This expansion of Section 206C(1F) marks a significant compliance shift for high-end retailers and consumers of luxury goods. Stakeholders should ensure immediate alignment with the new rules to avoid penalty under Section 271CA or prosecution under Section 276BB.