Income tax highlights of Budget 2020

All about the personal finance changes made in Budget 2020

Highlights

  • A new income tax regime has been proposed. A taxpayer can opt for it by forgoing 70 tax exemptions.
  • A taxpayer has an option to choose between existing tax regime and new tax regime.
  • Budget 2020 has proposed amendments in the defintion of income tax residency in India.
By Shalini Jain

The Finance Minister introduced several proposals in relation to the personal tax regime in the Union Budget 2020 presented in the parliament on February 1, 2020.

  • Determination of residential status for certain categories of individuals
The budget 2020 proposes to introduce the following amendments in determining residential status for certain categories of individuals.


As per the proposed amendments, a citizen of India would be deemed to be a resident of India in any financial year, if such individual is not liable to tax in any other country.

As per existing provisions, an Indian Citizen or Person of Indian Origin, who being outside India, comes on a visit to India in any financial year, would be considered as a resident in India, if such individual stays in India for 182 days or more. The amendment proposed by the budget provides for such an individual to be resident in India in either of the two scenarios – (i) the individual’s stay in India during the financial year is 182 days or more; or (ii) the individual’s stay in India is 120 days or more in the current financial year and 365 days or more in the preceding 4 financial years.

The basic conditions for determining residential status for other categories of individuals remains the same.

  • Conditions to be categorized as not ordinarily resident or ordinarily resident
A resident in India would be considered as not ordinarily resident if the individual has been a non-resident in India in 7 out of 10 preceding financial years.

Individuals should take note of the proposed amendments in relation to residential status since the taxability of income depends on the residential status. While non-residents and not ordinarily residents are taxed on India sourced income, ordinarily residents are taxed on their worldwide income in India.

While there is no change in the existing Income-tax slab rates for individuals, a new tax regime has been proposed under which individuals foregoing exemptions and deductions would be taxed at reduced tax rates.

The exemptions and deductions that would need to be foregone includes inter alia exemptions and deductions claimed widely by individuals including House Rent Allowance (HRA), Leave Travel Concession (LTA), standard deduction, deductions under Section 80C, deduction in relation to self-occupied house property, set-off of loss from house property against any other source of income etc.
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The Income-tax slab rates applicable under the new tax regime would be:
Slab Rates

Rate of tax

Up to INR 2,50,000

Nil

INR 2,50,001 to INR 5,00,000

5%

INR 5,00,001 to INR 7,50,000

10%

INR 7,50,001 to INR 10,00,000

15%

INR 10,00,001 to INR 12,50,000

20%

INR 12,50,001 to INR 15,00,000

25%

Above 15,00,000

30%


Surcharge and education cess would apply as per existing rates.
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The new tax regime is optional. Individuals who opt to claim available exemptions/ deductions would be taxed as per the existing rates.

Individuals who earn taxable income up to INR 5,00,000 continue to be exempt from tax liability under the existing and new tax regimes.

How the new income tax regime will impact taxpayers under different incomes
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Your personal income taxes just got more complex. In Union Budget 2020, Nirmala Sitharaman introduced a "simplified", optional regime with three new tax slabs. However, taxpayers can continue with the existing structure if that suits them more. Although the doing away of exemptions and deductions simplifies compliance, taxpayers who exploited deductions to the fullest may pay more tax under the new regime. The budget has tried to put more money in the hands of taxpayers by curtailing the incentives to save.

The tax exemption given to incomes up to Rs 5 lakh remains unchanged. Salaried taxpayers who opt for the new regime will have to forgo standard deduction as well as exemptions under chapter VI-A, including HRA, investments under Section 80C, medical insurance premium and even leave travel allowance which is tax free, if claimed once in a block of two years.

Your personal income taxes just got more complex. In Union Budget 2020, Nirmala Sitharaman introduced a "simplified", optional regime with three new tax slabs. However, taxpayers can continue with th..
Read More

What’s out: Here are a few of the 70 exemptions and deductions you won’t see in the new regime- Section 80C investments, house rent allowance, home loan interest, leave travel allowance, medical insurance premium, standard deduction, savings account interest, education loan interest.

What stays: Around 50 tax exemptions remain untouched, including- Standard deduction on rent, agricultural income, income from life insurance, retrenchment compensation, VRS proceeds, leave encashment on retirement.

Surcharges on tax remain untouched. Taxpayers with income between Rs 50 lakh and Rs 1 crore continue to pay 10% surcharge, between Rs 1 crore and Rs 2 crore pay 15%, between Rs 2 crore and Rs 5 crore pay 25% and those with income over Rs 5 crore pay 37%. So those earning just below these limits will not benefit if they forego the exemptions and move to the new regime. Given below is the math to explain how the new regime will affect tax outgo of taxpayers at different income levels.

What’s out: Here are a few of the 70 exemptions and deductions you won’t see in the new regime- Section 80C investments, house rent allowance, home loan interest, leave travel allowance, medical insu..
Read More

From the calculations above, we see that it makes sense for this taxpayer to shift to the new regime with reduced income tax rates. With or without deductions, he would continue to pay more under the existing regime. The new regime helps him cut his tax outgo.

From the calculations above, we see that it makes sense for this taxpayer to shift to the new regime with reduced income tax rates. With or without deductions, he would continue to pay more under the..
Read More

Here, the existing tax regime with deductions is the one that minimises tax outgo. The taxpayer will not benefit if he makes the switch to the new regime.

Here, the existing tax regime with deductions is the one that minimises tax outgo. The taxpayer will not benefit if he makes the switch to the new regime.

For a salaried taxpayer with an annual income of Rs 60 lakh, again the current, existing regime with deductions is more tax efficient. Under the new regime, the tax outgo is more than Rs 60,000 higher.

For a salaried taxpayer with an annual income of Rs 60 lakh, again the current, existing regime with deductions is more tax efficient. Under the new regime, the tax outgo is more than Rs 60,000 highe..
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Here too, the tax outgo is higher under the new regime. If the taxpayer chooses to make the switch, his tax out go will be more than Rs 62,000 higher than what he would be paying in the existing regime with deductions.

Here too, the tax outgo is higher under the new regime. If the taxpayer chooses to make the switch, his tax out go will be more than Rs 62,000 higher than what he would be paying in the existing regi..
Read More

  • Certain contributions to be taxed as perquisite
Contributions exceeding INR 7,50,000 made by employer to an employee’s account in a recognized provident fund, notified pension scheme or approved superannuation fund would be taxable perquisite in the hands of the employees.The annual accretions to such contributions exceeding INR 7,50,000 would also be considered as taxable perquisite.

  • Taxation of benefits under Employee Stock Benefit Plans
Securities issued under Employee Stock Benefit Plans by employers are taxable in the hands of the employees at the time of their exercise (i.e. allotment). In case of eligible start-ups, the payment of tax on such benefit is proposed to be deferred to within 14 days after (i) 5 years from the end of financial year in which options are exercised, or (ii) date of sale of such security by the employee or (iii) the date of the employee ceasing employment with the company, whichever is earliest.

  • Taxation of dividend from domestic companies and mutual funds
As per the existing provisions of the Income-tax, domestic companies that declare, distribute or pay dividend are required to pay a dividend distribution tax.Such dividend was exempt in the hands of the recipients up to INR 10,00,000.

It is proposed to remove the dividend distribution tax payable by companies and tax the dividend from such companies and mutual funds in the hands of the recipients at the tax rates applicable to the respective recipients (i.e. applicable slab rates for individuals.)

  • Enhanced timeline to take loan to buy home under affordable housing scheme
An additional deduction of INR 1,50,000 was made available in the Finance Act 2019 in relation to interest on loan taken for acquisition of house property for which the stamp duty value does not exceed INR 45,00,000.Such deduction was available subject to satisfaction of specified conditions including that the loan is required to be sanctioned between 1 April 2019 to 31 March 2020.The present budget proposes to extend the timeline for sanction of such loan to 31 March 2021.

  • Efficient tax administration
The FM stressed the need for efficiency of tax administration and proposed the incorporation of a “Taxpayer’s Charter” in the statute with the objective of ending taxpayer harassment.The contents of the charter would be notified soon.

A system to allot Permanent Account Number (PAN) based on Aadhaar would be introduced by which PAN would be instantly allotted online without requirement to fill up detailed application form.

In line with the faceless assessment process that has been introduced, the budget proposed to introduce faceless appeal process.

It has been proposed to bring a scheme “Vivad se Vishwas” for reducing litigations. Under the scheme, a taxpayer would be required to pay only the amount of the disputed taxes and will get complete waiver of interest and penalty provided the taxes are paid by 31 March 2020.Those who avail the scheme after 31 March 2020 will have to pay some additional amount. The scheme will remain open till 30 June 2020.

(The author is tax partner, EY India.)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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