Finance Minister, Nirmala Sitharaman, introduced the Union Budget 2020-21 on February 1, 2020 with a slew of changes relating to personal taxation. Here’s a rundown of everything that’s changed in the personal tax regime.
Residential status determination for certain categories of individuals
According to the amendments that have been proposed in Budget 2020, an Indian citizen will be deemed to be a citizen of India during any financial year if this person is not liable for tax in any other country.
Existing provisions state that, an Indian Citizen or Person of Indian Origin, who resides outside India, visits India for a period of 182 days or more in any financial year, will be considered a resident of India. The proposed amendments deem such a person to be resident in India in either of two scenarios: (1) the person stays in India in any financial year for 182 days or more or (2) the person has stayed in India for 120 days or more in the current financial year and has stayed for 365 days or more in the preceding 4 financial years.
The standard conditions for determining the residential status for other categories of individuals are unchanged.
Conditions to be categorized as not ordinarily resident or ordinarily resident
An individual residing in India will be categorized as not ordinarily resident if they have been non-resident in India for 7 out of 10 preceding financial years. Non-residents and not ordinarily residents are taxed on India sourced income but ordinarily residents are taxed on their global income in India.
New optional tax regime
Budget 2020 has introduced a new tax regime under which taxpayers that choose to forego exemptions and deductions would be taxed at reduced tax rates for income tax. Inter alia exemptions and deductions such as 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. are what taxpayers will have to forego in order to be taxed under the reduced rates. Surcharge and education cess would apply as per the previous norms. Taxpayers who wish to claim the exemptions/ deductions will be taxed as per the previous tax regime.
Certain contributions to be taxed as perquisite
Any contributions made by an employer towards an employee’s account in a recognized provident fund, notified pension scheme or approved superannuation fund exceeding INR 7,50,000 will be taxable perquisite in the hands of the employees. The annual accretions to such contributions exceeding INR 7,50,000 will be considered as taxable perquisite as well.
Benefits under Employee Stock Benefit Plans to be taxed
Securities issued as part of the Employee Stock Benefit Plans by employers are taxable in the hands of the employees at the time of allotment. In the case of a new business or start up, the tax on benefits is proposed to be deferred within 14 days of (1) 5 years from the end of the financial year in which the options were allotted (2) the date of sale of securities by the employee or (3) the date on which the employee leaves the employment of the organization, whichever is earlier.
Taxation of dividend from domestic companies and mutual funds
According to the current income tax norms, domestic companies that declare, distribute or pay dividend are mandated to cough up a dividend distribution tax. This dividend was exempt in the hands of the recipients up to INR 10,00,000. FM Nirmala Sitharaman has proposed to ax the dividend distribution tax and tax this dividend in the hands of the recipients at the tax rates applicable to the respective taxpayers (i.e. applicable slab rates for individuals).
More time provided to avail 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. This deduction was available to individuals subject to satisfaction of specified conditions including that the loan is required to be sanctioned between 1 April 2019 to 31 March 2020 under the affordable housing scheme. The present budget proposes to extend the timeline for sanction of such loan to 31 March 2021.
Efficient tax administration
The FM also gave emphasis on the need for efficient tax administration and announced the creation of a “Taxpayer’s Charter” with the view to end harassment of taxpayers. The contents of the charter will be notified soon. Furthermore, a new system for allotting PAN based on Aadhaar will be introduced due to which PAN can be directly allotted online without having to fill up application forms. Budget 2020 has also proposed to bring forward the faceless appeal process.
The Finance Ministry will also introduce a new scheme known as “Vivad se Vishwas” for reducing litigations. The scheme stipulates that an individual will only have to pay for the amount of disputed taxes and the interest and penalty will be waived off if the taxes are paid off by March 31, 2020. There is an additional fee applicable for taxpayers who avail this scheme after March 30, 2020. The scheme will remain open till June 30, 2020.