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Budget 2021: A host of tax proposals for Individuals

Without any additional tax or cess, the budget has done a fine balancing act

February 05, 2021 / 10:55 AM IST

In the first Budget for the new decade, the good part is that there is neither change in the tax rates nor introduction of any new Cess for individuals, even as the fiscal deficit increased due to the pandemic. The choice of old and new tax regimes for applicable slabs continue for FY 2021-22.

Also, the following announcement from Budget 2021 is a welcome move:

-ease of compliance and prefilled ITRs capturing majority of Indian sourced investment income

-exemption from income tax return filing requirement for senior citizens above 75 years of age earning only pension and Bank interest income.

-Greater transparency through Faceless Appellate Tribunal proceedings and through introduction of Faceless Dispute Resolution Committee for small and medium taxpayers.

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-Dividend Income to be considered only on declaration while computing advance tax liability. This will reduce undue interest burden arising to individuals which was otherwise applicable on estimated dividend of the full year

-Deduction in respect of interest on affordable housing loan scheme is proposed to be extended for 1 more year i.e. till 31 March 2022, subject to fulfilment of conditions.

-Leave Travel concession benefit available on spending on specified goods/ services for FY 2020-21 earlier announced by way of press release is codified

However, few of the below expectations of salaried individuals have not been met:

-Higher tax deductions for housing loan interest considering the interest burden

-Grant of tax deduction or increase in standard deduction for work from home expenses,

-Medical expenses to be allowed on actual basis for non-senior citizens considering the likelihood of increased medical cost for an individual or his family members impacted due to pandemic,

Some of the above relief would have helped an individual to manage his cash outflow, increase spending and incentivise savings; especially, considering the current economic scenario where the pay of the individuals is almost at a status quo or is having a downward trend.

While these expectations must not have been met due to fiscal considerations, following changes in the tax law would hit high on the pocket of individuals and may disincentivise savings in specified schemes

Interest from Public Provident Fund (PPF)/ Recognised Provident Fund (RPF) and Statutory Provident Fund (SPF) partially taxable

-Interest accrued during the financial year 2021-22 in respect of contributions made by an individual to EPF, PPF, SPF in excess of INR 2.5 Lakh will now be taxable. Manner to compute interest on such contribution over INR 2.5 lakh is yet to be prescribed.

-Further, this move along with amendment of Finance Act, 2020 whereby employer’s contribution to specified retirals (including EPF, SPF) over and above INR 7.5 lakhs somewhere reflects a move of the Government from EEE (Exempt on contribution-Exempt on accrual -Exempt on withdrawal) regime of taxation to partial TTE regime (Taxable on contribution – Taxable on accrual – Exempt on withdrawal?) Withdrawal related exemptions are not yet clarified by the Government and the same is awaited.

-Taxation of interest income on employee’s contribution to SPF / RPF, would be in a way a harsh step where employee is on the one side mandatorily required to do a matching contribution as employer’s contribution and on the other hands interest above certain cap will now be mandatorily taxable

Unit Linked Insurance Policies (ULIPs) now under the ambit of taxation

Proceeds from ULIPs (including bonus) issued on or after 1 February 2021 will be taxable as capital gains if annual premium during the term of the policy exceeds INR 2.5 Lakhs either for individual policy or in aggregate for multiple policies.

Therefore, exemption from ULIPs are grandfathered for;

-ULIPs issued prior to 1 February 2021 and

-for ULIPs issued after 1 February 2021 only if the premium is below prescribed threshold of INR 2.5 lakhs per annum during the term of the policy or if such proceeds are received on death.

Further, some of key amendments that are worth noting for persons settled overseas too are provided below:

-The Term ‘liable to tax’ is now defined under the proposed tax law. This will require impact analysis for Non-resident Indians settled overseas as till date, such term was analysed basis the judicial precedents applicable for Double Tax Avoidance Treaties. One may also need to evaluate, if such definition of ‘liable to tax’ would unsettle the settled controversies for Treaty provisions

-Higher withholding to be applied by the payer of income for certain provisions if payees have not filed their income tax returns for two years. The Finance Act, 2020 had exempted certain non-resident taxpayers from income tax return filing requirement where they have only investment income. Therefore, the new withholding provisions will in a way mandate such exempted taxpayers also to file their income tax return so save them from higher withholding.

-Some relaxation rules to avoid mismatch of foreign retirement funds accrual likely to be announced for India tax residents. This could largely be relevant for returning Indians.

While these are the Budget Proposals; the final impact for individuals is still awaited, and will be clear upon the enactment of the law.

(Rupali Ashar, Senior Manager-Tax at EY, also contributed)
Mayur Shah is Tax Partner–People Advisory Services
first published: Feb 5, 2021 10:55 am

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