The Finance minister in her speech said, ‘Currently 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. It is almost impossible for a taxpayer to comply with the Income-tax law without taking help from professionals.

Hence, the main aim of new tax reforms is to

  • Simplify tax structure
  • Bring ease of compliance
  • Reduce litigation’

This article is aimed at summarizing the various changes in Income tax act which would effect an individual tax payer.

New Tax scheme

An option was provided to Individuals and HUF to opt for lower tax rate by foregoing certain exemptions / deductions.

New tax rates under this option are

Total Income (Rs.) Rate
Upto 2,50,000 NIL
From 2,50,001 to 5,00,000 5%
From 5,00,001 to 7,50,000 10%
From 7,50,001 to 10,00,000 15%
From 10,00,001 to 12,50,000 20%
From 12,50,001 to 15,00,000 25%
Above 15,00,000 30%

The Surcharge and  SHEC will be in addition to the tax calculated above.

There was no specific mention about the extension of Rebate u/s 87A for new tax scheme. Hence, the Rebate of Rs. 12,500/- may not be available to the person opting for the new tax rates.

Moreover, if this option is availed, then the tax payer is not eligible to claim few exemptions or deductions. The common deductions, availed by the tax payer which are restricted are

  • Standard deduction of Rs.50,000/- for Salaried employees,
  • Deduction of professional tax paid by the salaried employee.
  • House rent allowance
  • Leave travel Concession
  • Contribution to Recognized Employee Provident Fund (EPF) & Public Provident Fund (PPF)
  • Deduction for Life Insurance Premium paid , Tuition Fees , Repayment of Housing Loan, Contribution to Sukanya Samriddhi Yojana
  • Contribution to certain pension funds. However, deduction for employers contribution to pension scheme notified by Central Government is allowed.
  • Deduction in respect of medical insurance premium and Medical expenditure
  • Deduction in respect of interest loan taken for higher education
  • Deduction in respect of donations to certain funds, charitable institutions etc.
  • Deduction for Rent Paid
  • Deduction in respect of interest on deposits in savings accounts
  • Deduction in respect of family pension
  • Deduction of interest on home loan for self occupied house property.
  • Exemption of Rs. 1500/- provided when minor’s income is included in tax payers income
  • Tax holiday for SEZ
  • Additional depreciation provided to the person earning business income
  • Additional deduction in respect of Investment in Plant and Machinery in notified areas

This scheme is not mandatory and a person may also choose to claim exemptions and pay tax at old rates.

It is to be noted that the new tax scheme is not beneficial to every tax payer. Hence a conscious decision needs to be made by the taxpayer before exercising this new scheme by evaluating both the options available.

Procedure for exercising the new tax scheme

  • The person not having business income, has to exercise this option while filing IT Return. He is free to opt in or opt out of the scheme every year.
  • However, in case of the person having business income, Option has to be exercised once and it will be valid for that year and subsequent years. If a person wants to opt out of the scheme in any subsequent assessment year, he can do so but only once. The person can never opt for the Scheme again.

Other Changes in the act

Tax on dividend

  • The entire Dividend amount received is taxable in the hands of individual.
  • The Exemption upto Rs. 10Lakhs which was there earlier is removed.
  • TDS @ 10% will be deducted by the payer if the amount of dividend paid in any mode exceeds Rs. 5000/-.

Tax Audit

  • Generally, a person carrying on the business is required to get his books of accounts audited if his Sales, turnover or gross receipts exceeds Rs. 1 crore.
  • However, A person carrying on the business is not required to get his books of accounts audited if all the following conditions are satisfied,
  • Sales, turnover or gross receipts does not exceed Rs. 5crores
  • The aggregate of all receipts in cash during the year does not exceed 5% of such receipt;
  • The aggregate of all payments in cash during the year does not exceed 5% of such receipt.
  • The due date of filing income tax return by a person liable to tax audit is extended to 31 October, which was 30 September previously.

Tax on Employers contribution

Employer’s contribution in a year to

  • National Pension Scheme,
  • Superannuation fund and
  • Recognised provident fund exceeding Rs. 7,50,000/- is taxable

Deduction for interest  

The existing deduction in respect of interest on loan taken from any financial institution for acquisition of an affordable residential house property is extended till 31-Mar 2021.

Amnesty Scheme

  • To reduce tax litigations, ‘Vivad Se Vishwas’ scheme (No Dispute but Trust Scheme) was proposed .
  • Under this 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 he pays by 31st March, 2020.
  • Those who avail this scheme after 31st March, 2020 will have to pay some additional amount. The scheme will remain open till 30th June, 2020

Action points for Tax payer

  • Project your income and Investments for the next financial year.
  • Assess the two options available for paying tax and choose one among them.
  • Give a declaration to your employer if any, regarding your option of paying tax, so that the TDS will be deducted accordingly.
  • A person having business income must exercise the option (if chosen to opt) in the prescribed form and manner.
  • The current salary structure to be assessed to maximize the benefits of new tax structure.

Special Thanks to CA Varsha Chawda for vetting this article.

The author can be reached at Priyanka.doddavari@gmail.com.

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Qualification: CA in Job / Business
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Location: Hyderabad, Telangana, IN
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