7 direct tax announcements in Budget 2021 and its impact on taxpayers

The Finance Minister Nirmala Sitharaman presented the Union Budget for FY 2021-22 on February 1. The theme for the direct tax proposal was simplification of the tax administration, ease of compliance and reduction of litigation. The key aspects of the direct tax proposals impacting individual taxpayers are discussed below.

Extension of home loan interest tax break
In order to encourage first time homebuyers, deduction on account of home loan interest up to Rs 1.5 lakh which was available on loans taken up to March 31, 2021, has now been extended by one year to March 31, 2022. This is a welcome amendment aimed at dual objectives - boosting the real estate sector as well financially supporting new homeowners.

Increase in safe harbour threshold between purchase price of house and stamp value
On a related note, homebuyers were taxed for differential between purchase price and stamp value if the latter was excessive. For this purpose, a difference of 10% was considered normal. Considering the reduction in real estate prices in recent times, this budget proposes to increase the safe harbour threshold from 10% to 20% thus avoiding uncalled for taxation in the hands of the home buyers. This provision is applicable for purchase of house from November 12, 2020 till June 30, 2021 provided it is a first time allotment of residential unit and the purchase price does not exceed INR 2 Crore.


Introduction of section 89A
Individuals who travelled abroad on secondments would have invested in overseas retirement funds for social security purposes. There was dichotomy in the timing of taxation of income from such funds in the overseas jurisdiction and India (accrual basis vis-a-vis withdrawal basis), which led to tax credit mismatches and double taxation. Realizing this practical hardship, the Government proposes to introduce Section 89A to tax such income from retirement funds in a manner to be prescribed.

High premium ULIPs to lose tax edge
Currently, sums received under an insurance policy, including bonus are exempt subject to certain conditions. It is proposed that unit linked insurance policies with yearly premium in excess of Rs 2.5 lakh will not qualify for the above exemption. The return on such policy would be taxable at par with listed equity oriented mutual funds. Similarly, interest accrued on provident funds shall be subject to tax to the extent annual contribution exceeds Rs 2.5 lakh. The above provisions are to check excessive investment in avenues which give rise to exempt income.

Paying advance tax on dividends made easier
From April 1, 2020, dividends were taxable in the hands of the shareholders. From an advance tax perspective, it was impossible for the taxpayer to pre-empt dividend distribution, which leads to interest under section 234C of the Income-tax Act, 1961. Suitable amendments have been made to section 234C to the effect that advance tax liability on dividend would arise when the same is actually received.

ITR filing exemption for 75 years and plus seniors
Considering the challenges faced by elderly citizens in filing tax return year on year, an exemption from tax return filing is proposed if the person has income only in the nature of pension and bank interest on which taxes are appropriately deducted. This exemption is applicable for senior citizens who are of the age of 75 years or more and the exemption can be claimed by filing a declaration to the bank.

Capital gains to be pre-filled in ITR
From tax return filing perspective, te FM also noted, that the pre-fill facility in the tax return would be made more robust to include details of capital gains on listed securities, dividends, bank and post office interest. The above would further ease the return preparation process.

Whilst the tax rates have remained stable, the taxpayers' expectation of higher investment limit/ medical expenditure spend has not been fully addressed. Moreover, restrictions imposed on exemptions for ULIP, provident fund, could lead to taxpayers moving away from such investment avenues. Having said the above, the government has proposed positive measures such as relaxation in stamp duty based taxation, streamlining leave travel concession, exemption in return filings in certain cases, which should bring cheer to the common man.

(The author is Partner tax and regulatory, PWC India.)