In a marathon Budget speech on 1 Feb 2020, Finance Minister, Nirmala Sitharaman, proposed to introduce simplified tax regime, new tax slabs with reduced rates for an annual income of up to Rs 15 lakh for those not taking exemptions and deductions. The new system is, however, optional and will co-exist with the old one with three slabs and various exemptions and deductions.  How do you decide which one to pick? Dividend Distribution Tax (DDT) has been abolished and dividends will be taxed in hands of the recipient taxpayers at applicable slab rates. This article looks at Budget 2020 and changes proposed.

Union Budget FY 2020-21

• Dividend Distribution Tax (DDT) has been abolished and dividends will be taxed in hands of the recipient taxpayers at applicable slab rates. TDS @ 10% will be applicable on dividend paid to an individual exceeding 5,000 during the year. It will not be applicable on the capital gains.
• Deposit insurance cover raised to Rs 5 lakh.
• Instead of the annual tax statement (Form 26AS) for taxpayers on the online tax portal, a more comprehensive annual financial statement which will capture multiple information such as sale/purchase of immovable property, share-based transactions, etc in addition to details of taxes deducted at source has been proposed. This will enable taxpayers to reconcile the details reported in their tax returns with the information already available with the tax authorities, thereby reducing litigation.
• ‘Vivaad se Vishwas’ Scheme to be introduced to settle pending income tax disputes where taxpayers can pay the amount of disputed tax (no interest or penalty) on or before March 31, 2020. Taxpayers can also pay tax under dispute by June 30, 2020 with some additional amount (expected to be lower than the penalty/interest exposure) under this scheme.
• Travelling abroad or making a foreign remittance under the Reserve Bank’s Liberalised Remittance Scheme (LRS). Tour operators/banks (authorised dealers) will collect tax at source of 5% from you. If you don’t furnish your PAN/Aadhaar, the tax to be collected will increase to 10%
• All income tax notices will be issued only in electronic mode. You may also receive intimation on your registered email ID. Do keep personal details like email id and mobile number updated on the income tax department’s portal for timely receipt of such notices.
• Employer’s contribution to provident fund, National Pension System and superannuation fund exceeding in total 7.5 lakh per year to be taxed as salary in hands of the employee. Interest, dividend and other similar incomes arising on such excess contribution (exceeding 7.5 lakh) to be taxed as well. This will lead to additional tax liability, especially for high net worth individuals.
• Payment of tax on ESOPs received by employees of eligible startups to be deferred. Such tax is now payable on completion of five years from the year of allotment of shares or sale of shares or cessation of employment, whichever is earlier. This will improve cash flow for employees. However, such benefits are only available for employees of eligible startups and not of all employers.
• For Homebuyers:
  • No adjustments to the sale consideration on transfer of immovable property can be made where variation between stamp duty value and sale consideration is not more than 10% of latter (earlier 5%). This will reduce hardship to taxpayers for genuine transactions in real estate.
  • Additional tax deduction of up to 1.5 lakh for interest on housing loan has been extended to loans sanctioned up to March 31, 2021 (earlier, March 31, 2020).
• Resident of India
  • Budget 2020 proposes that if an individual who is a citizen of India or person of Indian origin visits India for 120 days or more in a financial year and had spent more than 365 days in last four years, then such an individual will also become ‘resident’ in India.
• NRI: ‘ordinarily resident
  • Budget 2020 has proposed to hike the number of years required of being a resident by an individual to qualify as ‘ordinarily resident’ from at least two years currently to at least four years out of the previous 10 years. This would make the ‘not ordinarily’ resident to ‘ordinarily resident’ easily if he was resident individual in four years out of the 10 previous years.
  • Currently, as per income tax laws, an individual qualifies as a resident individual if he/she stays for more than 182 days in the country.
• Details of the eligible donation under Section 80G will be pre-filled in the income tax returns on the basis the information submitted by the donee (charitable institution). There is a possibility of claims being disallowed if the proper details of donations are not submitted.
• The Budget also impacts you through higher customs duties on a whole range of imported products, from footwear to electronics, furniture, wall fans, kitchenware, as well as some alcoholic beverages. All of these could get costlier.

Income Tax Slabs in Budget 2020-21

Finance Minister, Nirmala Sitharaman, proposed to introduce simplified tax regime, new tax slabs with reduced rates for an annual income of up to Rs 15 lakh for those not taking exemptions and deductions. The new system is, however, optional and will co-exist with the old one with three slabs and various exemptions and deductions.  It is an effort to provide relief and simplicity to taxpayers, particularly those at lower and middle-income levels.

New tax regime comes under section 115BAC

The tax structure has been rejigged with the introduction of four thinly-sliced tax slabs between Rs 5 lakh and Rs 15 lakhs. from 20% to 10% between Rs 5 lakh and Rs 7.5 lakh, from 20% to 15% in the Rs 7.5 lakh-Rs 10 lakh bracket, from 30% to 20% for Rs 10 lakh-Rs 12.5 lakh and from 30% to 25% between Rs 12.5 lakh and Rs 15 lakh.

Income Tax FY 2020-21 with or without exemption

The FM in her speech said this would lead to “substantial tax benefit” and gave the example of a person earning Rs 15 lakh and not using any exemptions now will pay only Rs 1.95 lakh of tax, as compared to Rs 2.73 lakh — a saving of Rs 78,000. This optional scheme, the FM said, is estimated to cost the exchequer Rs 40,000 crore a year in foregone I-T revenues.

Those availing of deductions and exemptions might choose to go for status quo i.e old way and pay tax as per the old regime.  What the speech did not spell out, but the Budget documents did, is that the option to choose the new scheme would be reversible for those who do not have any business income. If you are a businessman and opt for the new regime, you can go back to the old system, but only once. However, for the salaried, there is no such restriction

List of Deductions, Exemptions

Finance Minister Nirmala Sitharaman said that 70 out of 100 deductions available to taxpayers in the old regime will not be available in the new regime.

List of Exemptions removed

Let’s look at the list of exemptions and deductions that go out if you opt for the new regime:

• Standard Deduction of Rs 50,000
• Leave Travel Concession
• House Rent Allowance(HRA)
• Deduction under Section 80C i.e. equity linked savings scheme (ELSS), provident fund (PF), insurance premium, school fees, and principal repayment on housing loan
• Interest on housing loan under section 24 Up to Rs 2 lakh
•  80CCC (contribution towards certain pension fund),
• Section 80D (health insurance),
• 80E (interest on loan for higher education),
• 80EE (interest on loan taken for residential property),
• 80EEB (purchase of electric vehicle):  Deduction on Auto Loan interest for purchase of electric vehicle Up to Rs 1.5 lakh
• 80EEA: Additional deduction on Home Loan interest on affordable houses u/s 80EEA – Up to Rs 1.5 lakh
• 80G (donation to charitable institutions),
• 80GG (rent paid).
• Deduction on Home Loan interest – 
• Food vouchers of Rs 50/meal

List of Deductions, Exemptions still available

The income tax deductions still available in the new regime include:

• Death-cum-retirement benefit
• Commutations of pensions
• Leave encashment on retirement
• Amount received on VRS up to Rs 5 lakh
• Employee Provident Fund money(EPF)
• Short-term withdrawals and maturity amount from the National Pension Scheme
• Money received as scholarship for education
• Cash received as awards constituted in public interest
• Deduction under sub-section (2) of section 80CCD (employer contribution on account of the employee in notified pension scheme) and section 80JJAA (for new employment) can be claimed.

With or Without Exemptions which Tax System to choose?

The answer to the question above depends on your level of income, whether you use tax-saving investments, and if so, to what extent.  For incomes up to Rs 15 lakh, you do get a lower tax rate, but this means you cannot avail of deductions and exemptions, ranging from HRA and standard deduction to those for investments under section 80C or medical insurance premium under Section 80D. That clearly involves a trade-off. Pensioners and new entrants to the job market, who have no investments in tax-saving schemes or HRA and LTA benefits may gain under the new tax regime.  

The total taxable income with maximum deduction and without deductions where tax is the same is shown below. Therefore, if your actual deductions are greater than the break-even points, you should stay back in the old regime or else you should opt for the new tax slabs. Our article Old or New Tax Regime to choose with Calculator for Income Tax for FY 2020-21 explains it in detail

For example, If your income is above Rs 15 lakhs or above, you are better off with the new regime if the deductions are up to Rs 2.5 lacs in a financial year. If your deductions are greater than Rs 2.5 lacs, you are better off sticking with the old tax slabs.

Old or New Tax Slabs for FY 2020-21: Amount at which tax are same

Dividend and Dividend Distribution Tax, TDS on Mutual Funds

DDT on dividends declared by Indian cos and Mutual Funds is abolished. Dividends paid on and after April 1, 2020, will be taxed in the hands of shareholders/equity mutual funds at their applicable rate. With the withdrawal of DDT, cos will have to deduct TDS @10% on dividends of over 5,000 during a fiscal. For Taxpayers like senior citizens who get dividends, will now have to do so or submit Form 15G/Form 15H to each company where they hold shares or equity mutual funds.

Abolition of DDT means dividend could be taxed at up to 42.7%, the highest rate of tax, including surcharges and cesses. The move is seen as a big disincentive for those using investments as tax saving instruments and could explain much of the market’s negative reaction to the Budget.

Currently, mutual funds are liable to pay DDT on equity and debt funds, but now investors have to pay tax on the dividend as per their income slabs. The same is true for those who choose the dividend reinvestment option. Shareholders earning dividend income of Rs 10 lakh or more have to bear a tax of 10% on such income, plus the applicable surcharge and cess. The dividend, no matter the amount, is tax-free in the hands of foreign shareholders (but they don’t get a tax credit in their home country on the underlying tax).

 Let us assume that X earned a taxable income of Rs 75 lakh, of which Rs 15 lakh is dividend income.

• A person with a taxable income of between Rs 50 lakh and Rs 1 crore is subject to a tax rate of 34.32%.
• Under the current provisions, a dividend of only Rs 5 lakh is taxed at a concessional rate of 10% plus applicable surcharge and cess.
• Under the Budget proposals, they will end up paying a higher tax as the entire dividend income will be added to the total taxable income and be subject to the regular applicable tax rate. Thus, they will bear a higher tax burden of Rs 4.58 lakh on account of dividend income

It’s complicated. To see if the new regime is beneficial, each individual will have to make their own calculations. It will depend on the level of deductions and exemptions you are claiming at the moment.

Source/Additional Links

1. Budget Memorandum
2. Finance Bill, 2020
3. Budget Speech

Related articles:

Understand Income Tax: What is Income Tax, TDS, Form 16, Challan 280

• Income Tax for FY 2019-20 or AY 2020-21 
• Income Tax for FY 2020-21 AY 2021-22, Union budget

What do you think of the new Union Budget? What do you think of new Income tax slabs? Is it more confusing or has become easier? Will you go for old system or new system?