As we get ready for Budget 2021, it’s time to take a quick look at how Budget 2020 changed the way we invest and spend. Here are some of the significant moves that altered our personal finances.
New Income Tax Regime
Lower tax rates are constantly demanded every year from all quarters. Last year, the finance minister did so with a twist, by introducing a new regime of lower tax rates. But she laid out conditions and made the new income tax regime optional. Individuals and Hindu undivided families can opt for the new system if they forgo the tax savings from exemptions and deductions available under the existing structure.
So, if you earn Rs 15 lakh a year and do not opt for any deductions, your total tax payable under the new regime would be Rs 1.95 lakh, as against Rs 2.73 lakh in the existing tax system.
The insurance cover for bank depositors was hiked to Rs 5 lakh per depositor from Rs 1 lakh earlier, under the Deposit Insurance and Credit Guarantee Corporation (DICGC). “The increase in deposit insurance limit was necessary,” says, Rajnish Kumar, Chairman, State Bank of India. Bank customers are still recovering from the PMC Bank crisis and short-term restrictions that had been placed on Yes Bank and Lakshmi Vilas Bank.
Dividend distribution tax
Dividends were made taxable in the hands of the investors. And so, Budget 2020 abolished divided distribution tax (DDT). Earlier, DDT was 29.12 percent for debt funds at the time of distributing dividends, 11.648 percent for equity funds and 34.944 percent when companies used to pay out dividends on their shares.
At the same time, dividends are now subject to tax deduction at source, if they exceed Rs 5,000 a year. “The abolishment of DDT helped people pay taxes on dividends proportionate to their income. Earlier, a person in 30 percent tax bracket as well one in the 5 percent slab were paying the same DDT,” says Karan Batra, founder and CEO of Chartered Club.
The Finance Minister Nirmala Sitharaman also extended the period for affordable home purchase to claim tax deduction by a year to March 31, 2021. An additional deduction of upto Rs 1.5 lakh against interest paid on loans for affordable house purchase can be claimed, provided the loan has been sanctioned before March 31, 2021.
An aggregate limit of Rs 7.5 lakh has been introduced on the tax-exempt employer’s contribution to recognized provident fund, superannuation fund and NPS in the accounts of an employee. “Any aggregate amount contributed by employers beyond Rs 7.5 lakh would be taxed,” says Homi Mistry, partner at Deloitte India.
Budget 2020 introduced a taxpayers charter that laid down the rights of the tax-payer and pledged more transparency. To reduce the physical interaction of taxpayers with income tax officials, a faceless assessment scheme was introduced for a transparent and an accountable assessment process.
Rahul Garg, senior Tax Partner at PwC India, says, “Faceless assessment is great; it will help increase transparency, reduce cost and time spent as well as minimise distraction of businesses around compliances.”
To reduce the litigations pending at various tribunals, forums and courts, Budget 2020 also introduced a new scheme called ‘Vivad Se Vishwas.’ The scheme allows taxpayers the choice of settling their income-tax disputes and would they get a complete waiver of interest and penalty. Only the amount of the actual disputed tax needs be paid.
To qualify as an Indian resident for taxation purpose, the time of stay in India was reduced to 120 days from 182 days. Also, it was proposed that an Indian citizen, who is not liable to tax anywhere, would be deemed to be a resident in India and accordingly tax would be applicable.
The provision of “resident but not ordinarily resident” was relaxed so that a resident who has been non-resident in seven out of ten previous years would be considered resident but not ordinarily resident.
Tax deferment was offered on Employee Stock Options (ESOPs) offered to employees by start-ups. The tax would be deferred for five years or until the employee leaves the company or sells the shares.