Know the tax changes on donations, dividend incomes and ESOPs before filing your returns

All individual tax-payers have been claiming several deductions and exemptions all along. In Budget 2020, Finance Minister Nirmala Sitharaman announced a new, alternative tax regime that offers lower slab rates. However, it has done away with over 70 tax deductions and exemptions that the existing regime offers.

Salaried tax-payers have the freedom to choose between the old and new regimes every year and are allowed to change their minds even at the time of filing tax returns. “Salaried taxpayers  are allowed to switch between the tax regimes every financial year (based on whichever is beneficial to them). This option can be exercised at the time of filing their tax return. Those opting for the new regime must also submit form 10IE,” explains Archit Gupta, Founder and CEO, Cleartax.in.

Tax on dividend income

Along with the introduction of the alternative tax regime, Budget 2020 also levied tax on dividend income in the hands of shareholders or mutual funds investors.

You will now have to declare this receipt in your tax return form as income from other sources. “Dividend distribution tax has been abolished. Now dividends are taxable in the hands of the shareholder. Companies will deduct TDS where dividend exceeds Rs 5,000 in one financial year. The TDS rate will be 10 percent where PAN has been provided and 20 percent if PAN is not available,” explains Gupta.

It will be added to your income and taxed as per the slab rate applicable to you. “This year, we have seen many tax-payers skipping declaring dividend income unknowingly. Now, if the dividend income is over Rs 5,000, the asset management company or the firm will deduct tax at source, and you will get to know as it will be reflected in your Form 26AS. However, if it is less than Rs 5,000, TDS will not necessarily be deducted,” explains Chetan Chandak, Founder, TaxBirbal.in.

This is why you need to be more cautious. "It should be traced in the bank account and the total dividend should be reported with the corresponding quarterly break-up,” he adds.

Some ESOP receipts not taxable 

If you, as an employee, have been allotted ESOPs (employee stock options) from your start-up this year, you might not have to pay tax in the year of exercising the option. It will be deferred to a future date. “The TDS on this ‘perquisite’ stands deferred to earlier of: expiry of five years from the year of allotment of ESOPs; date of sale of the ESOPs by the employee or date of termination of employment,” explains Gupta.

Rules for deemed residents

Introduced in financial year 2020-2021, this rule, too, will be effective this assessment year 2021-22. “An individual who is a citizen of India and has a total income (from other than foreign sources) in excess of Rs 15 lakh during a financial year, will be deemed to be resident in India in that year if he is not a tax resident of any other country,” says Gupta. That is, if she is not paying taxes in other countries, then she will have to pay taxes like any other ordinarily resident Indian tax-payer.

Deductions on cash donations restricted

Deductions on donations made under section 80G have to be claimed as part of tax return forms. “This assessment year, deduction under section 80GGA for certain donations for scientific research or rural development is available,” says Gupta. Since donations typically do not form a part of your Form-16, you will have to claim this new deduction in your income tax returns. “(earlier), cash donations were acceptable up to Rs 10,000; now the limit for cash donations has been restricted to Rs 2000. Donations in excess of Rs 2,000 made in cash will not be allowed as deduction,” adds Gupta.