Budget 2020: A move towards Simplification & Landmark Changes

1. The Income Tax Act is riddled with various exemptions and deductions which make compliance by the taxpayer and administration of the Income Tax Act by the tax authorities a burdensome process. In order to provide significant relief to the individual taxpayers and to simplify the Income-tax law, this Budget propose to bring a new and simplified personal income tax regime wherein income tax rates will be significantly reduced for the individual taxpayers who forgo certain deductions and exemptions. In the new tax regime, substantial tax benefit will accrue to a taxpayer depending upon exemptions and deductions claimed by him.

2. Old versus new

3. Taxpayer switching to new rates will not be entitled for deduction under Section 80C, which provides deduction for contribution towards insurance premium, deferred annuity, provident fund and certain type of shares. They will also have to forego deduction under Section 80CCC (contribution towards certain pension fund), Section 80D (health insurance), Section 80E (interest on loan for higher education), Section 80EE (interest on loan taken for residential property), Section 80EEB (purchase of electric vehicle), Section 80G (donation to charitable institutions), and Section 80G (rent paid). The new scheme will not get tax benefit for leave travel concession (LTC), allowances for income of minors, in respect of free food and beverages through vouchers provided to employees and certain allowances of MPs/MLAs.

However the following Income Tax Exemptions will continue  along with New Income Tax Rates 2020 :

• Income Tax Exemption under Section 80 CCD(2) on Employer Contribution in NPS (which is 14% of Basic Pay in the case of Central Government Employees)
• Income Tax deduction for Bank Interest up to Rs. 10,000 under Section 80TTA

4. The new tax regime shall be optional for the taxpayers.

The new tax slabs aim at increasing spending power of people. This will trigger consumption demand and in turn create an economic cycle. The move towards new tax regime will allow more money in the hands of people and this will allow them to spend more. This is because presently to get Rs 10,000 exemption, one has to invest about Rs one lakh in the old computation method. In the new method, there is no need to invest.

5. Deduction of Rs 3.50 lakh on home loan interested extended

In its previous Budget, the government has announced an additional deduction of Rs 1.50 lakh on home loan interest component for units priced up to Rs 45 lakh. This was over and above the Rs 2 lakh deduction offered under Section 24 of the Income Tax Act. This benefit, which was earlier available on loans borrowed till 2020, has now been extended till March 2021.

6. Concession on Real Estate Transactions

At the moment, while taxing income from capital gains, business profits and other sources in respect of transactions in real estate, if the consideration value is less than circle rate by more than 5 percent, the difference is counted as income both in the hands of the purchaser and seller. In order to minimize hardship in real estate transaction and provide relief to the sector, FM proposed to increase the limit of 5% to 10%.

7. DDT:

Abolishing of the DDT regime should benefit foreign investors/companies having subsidiary in India, as they should now be eligible to claim credit for the tax paid on dividends in India , subject to their domestic tax law and respective treaty provisions. The budget proposes to eliminate the cascading tax effect in case of inter-corporate dividends by providing a deduction in respect of dividends received by a domestic company to the extent such dividend is distributed, as specified.

It is also proposed that interest expenditure be allowed as deduction from dividend income, subject to a cap of 20% of such income. It is pertinent to note that the domestic company would be required to withhold tax at source at the rate of 10% where the dividend paid exceeds Rs. 5,000.

8. A change in residency rule

The government has proposed significant changes in the residency rules for individuals which had remained unchanged for many years. As per the current Indian tax laws, an Indian citizen or a person of Indian origin (PIO) visiting India is considered as non-resident if the stay in India in a tax year is less than 182 days.

It has been proposed that an Indian citizen/PIO visiting India for less than 120 days would qualify as non-resident as against 182 days earlier. Therefore, Indian citizens/PIOs visiting India for a longer period would need to evaluate their residential status vis-à-vis the new residency rules. As per Indian tax residency laws, a resident is further categorized as ‘ordinary resident’ and ‘not-ordinary resident’ and the tax liability in India differs for both categories. Broadly, an ordinary resident is taxable in India on his/her global income whereas a ‘not-ordinary resident’ is taxable on income arising outside India only if it is derived from a business controlled in or a profession set up in India.

The Finance Bill 2020 has proposed to amend the criteria for qualifying as a ‘not-ordinary resident’ in India.

A person would now qualify as a ‘not-ordinary resident’ if he has been a non-resident in India in 7 out 10 preceding tax years (erstwhile conditions included being non-resident for 9 out 10 preceding tax years or stay in India being less than 729 days in the preceding 7 tax years). This amendment would also require evaluating the residential status of expatriates working in India or Indians moving outside India.

Further, the criteria for deemed residency for citizens of India has been proposed. Under this, Indian citizens who are not liable to tax in any other country by virtue of residency, domicile or any other similar criteria, would be deemed tax residents of India.

The finance ministry has subsequently clarified that in case of an Indian citizen who becomes deemed resident under this provision, income earned outside India shall not be taxed in India unless it is derived from an Indian business or profession.

9. Employer contributions

Under the existing tax provisions, the contribution by the employer to an employee’s account in a recognized provident fund, approved superannuation fund or the National Pension Scheme is tax exempt provided the contribution to each fund is within the prescribed percentage contribution/amount. However, there is no combined upper limit for the total quantum that may be contributed by the employer.

The Finance Bill 2020 proposes to limit the tax exemption benefit where the contributions made by the employer under all these funds exceeds 750,000 in aggregate. Employees in high salary brackets may be impacted by this provision. The bill also proposes to tax the annual accretions from such funds on contribution in excess of 750,000 as perquisites.

10. Investment Clearance Cell

With a view to enhance the trust between the taxpayer and the tax collector and to nurture an atmosphere of mutual cooperation, the finance minister has announced the introduction of a taxpayer’s charter in the statute. The government has proposed to set up an ‘Investment Clearance Cell’ that will provide end-to-end facilitation and support, including pre-investment advisory, information related to land banks and facilitate clearances at Centre and state level.

11. Insurance

On the banking side, deposits upto Rs five lakh will be safe in case the bank face turmoil. Currently, depositors are entitled to get only up to Rs one lakh back irrespective of higher amount deposited. Now, the limit has been raised to Rs five lakh. In case of bank facing turmoil, all deposits up to Rs five lakh per depositor will be insured.

12. TDS for technical services U/s 194J

The Section 194J of the I-T Act deals with TDS on payments for services such as — fees for professional services and technical services, royalty and non-compete fee as referred under Section 28 (VA) of I-T Act. So far these services were charged with a TDS at 10 percent to a resident over Rs 30,000 during a financial year.

Now it is proposed to reduce the rate for TDS in section 194J in case of fees for technical services (other than professional services) to two percent from existing ten percent. The TDS rate in other cases under section 194J would remain the same at ten percent. This amendment will take effect from 1st April 2020.

The change in revised TDS rate is expected to address confusion and tax litigations arising out of the issue of less deduction of tax, particularly in their application on services rendered under Section 194J and Section 194C.

With this Budget it is clear that the government has set out its vision for improving the ease of living for all Indians through focused development in education, healthcare, infrastructure and industry.