Budget 2020 focussed on three key themes - Aspirational India, economic development and building a caring society for all. The Finance Minister also highlighted its focus on enhancing the purchasing power. In this backdrop significant personal tax proposals pronounced in the Budget today are as under:
New Optional Tax regime on Individual Incomes
With the intent of providing relief to the individual tax payers and simplifying of tax provisions, a new optional personal tax regime has been proposed wherein multiple income tax rates trigger on various slabs of income. Below is the new proposed regime of income tax rates and slabs. The currently prevailing tax rebate (of Rs 12,500 for individuals with income below Rs 5 lakh p.a.) as well as surcharge on income-tax (rates of surcharge differ as per income levels) as well as health and education cess (@ 4 per cent) on such tax will continue to be applicable on aforesaid tax rates as per the existing tax regime.
Individuals with no business income can exercise their choice of the new tax regime or existing tax regime every year at the time of filing the return of income from FY 2020-21.
The choice of the new tax regime, although, comes with a few riders such as:
- Foregoing prescribed exemptions under section 10 (such as leave travel concession, house rent allowance etc.), section 16 (standard deduction, professional tax, etc), section 24 (home loan interest in respect of self occupied property), etc.
- Denial of specified deductions under chapter VI-A of the Act (such as section 80C, section 80D, Section 80G, etc.)
- Restriction on other specified exemptions/ deductions etc depending upon certain specific cases.
Extension for deduction in respect of affordable housing
Additional deduction of up to Rs 1.5 lakh p.a. was introduced last year in respect of interest paid on loan taken for purchase of prescribed affordable house for first time home buyers. Such deduction was subject to the conditions that the loan shall be sanctioned on or before March 31, 2020. In order to further promote the ‘Housing for All’ objective, it has been proposed to extend the date of loan sanctioned by one more year, i.e., on or before March 31, 2021.
Variation in tax treatment of employer’s contribution
Employee Provident Fund (‘PF’) Scheme, National Pension Scheme (‘NPS’) and approved Superannuation Fund (SAF) are three of the most prevalent employer funded retirement schemes currently. The employer contribution to these schemes is currently not taxable in the hands of the employee up to specified limits (12 per cent of eligible salary for PF, 10 per cent of eligible salary for NPS and Rs 1.5 lakh per annum for SAF). In other words, currently, there is no combined upper limit for the purpose of deduction on the amount of contribution made by the employer.
It is now proposed to introduce a combined limit of Rs 7.5 lakh p.a. in respect of employer’s contribution in a year to these three funds/ schemes.
Consequently, it is also proposed that any annual accretion by way of interest, dividend, etc. earned on the accumulated corpus should be treated as a perquisite to the extent it relates to such employer’s contribution taxable in the hands of individual.
Modification in tax residency provisions
Indian citizens and persons of Indian origin who were on a visit to India had to stay for an extended period of 182 days in India before they could be regarded as a resident of India from an income tax perspective. This period has been proposed to be reduced to 120 days now.
Also, Indian citizens will always be regarded as residents of India irrespective of their stay in India in the relevant FY if they are not liable to pay tax in any other country/ territory on account of their residence/ domicile etc. This amendment could potentially impact many Indians who may be working/ staying in countries with no tax system. It is also believed that there is ambiguity in interpretation of the term “liable to be taxed,” which may require some further clarifications from the Government.
Under the current tax residency rules, after having determined an individual as a resident, there is a secondary test to determine whether the individual qualifies as a not ordinary resident (NOR) or ordinary resident (OR). This test has been modified significantly. As per the proposed new test, an individual will be an NOR provided he/she has been a non-resident for seven out of the past 10 FYs.
Other measures
There have also been a slew of other measures on overall ease of compliance; for e.g., faceless appeals process, instant allotment of Permanent Account Number (PAN) etc. This is in line with the overall agenda of the Government of simplification and digitization of compliances.
In summary, with focus on enhancing consumption, the Government has attempted to leave more disposable income in the hands of the common man and at the same time kept the fiscal consolidation objective in mind. There has also been significant focus on enhancing the efficiency of the tax administration through use of technology, ease the burden of compliance for the taxpayer etc.
(The writer is Partner and Head, Global Mobility Services – Tax, KPMG in India)
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
