The Finance Minister introduced several proposals in relation to the personal tax regime in the Union Budget 2020 presented in the parliament on February 1, 2020, which are as follows:
1. Determination of residential status for certain categories of individuals
The budget 2020 proposes to introduce the following amendments in determining residential status for certain categories of individuals. As per the proposed amendments, a citizen of India would be deemed to be a resident of India in any financial year, if such individual is not liable to tax in any other country. As per existing provisions, an Indian Citizen or Person of Indian Origin, who is outside India, comes on a visit to India in any financial year, would be considered.
2. Conditions to be categorized as not ordinarily resident or ordinarily resident
A resident in India would be considered as not ordinarily resident if the individual has been a non-resident in India in 7 out of 10 preceding financial years. Individuals should take note of the proposed amendments in relation to residential status since the taxability of income depends on the residential status. While non-residents and not ordinarily residents are taxed on India sourced income, ordinarily residents are taxed on their worldwide income in India.
3. Optional new tax regime
While there is no change in the existing Income-tax slab rates for individuals, a new tax regime has been proposed under which individuals foregoing exemptions and deductions would be taxed at reduced tax rates. The exemptions and deductions that would need to be foregone includes inter alia exemptions and deductions claimed widely by individuals including House Rent Allowance (HRA), Leave Travel Concession (LTA), standard deduction, deductions under Section 80C, deduction in relation to self-occupied house property, set-off of loss from house property against any other source of income, etc.
Comparison between the new regime and the old regime:
Surcharge and education cess would apply as per existing rates. The new tax regime is optional. Individuals who opt to claim available exemptions/ deductions would be taxed as per the existing rates. Individuals who earn taxable income up to INR 5,00,000 continue to be exempt from tax liability under the existing and new tax regimes.
4. Contributions to be taxed as perquisite
Contributions exceeding INR 7,50,000 made by employer to an employee’s account in a recognized provident fund, notified pension scheme or approved superannuation fund would be taxable perquisite in the hands of the employees. The annual accretions to such contributions exceeding INR 7,50,000 would also be considered as taxable perquisite.
5.Taxation of benefits under Employee Stock Benefit Plans
Securities issued under Employee Stock Benefit Plans by employers are taxable in the hands of the employees at the time of their exercise (i.e. allotment). In case of eligible start-ups, the payment of tax on such benefit is proposed to be deferred to within 14 days after (i) 5 years from the end of financial year in which options are exercised, or (ii) date of sale of such security by the employee or (iii) the date of the employee ceasing employment with the company, whichever is earliest.
6. Taxation of dividend from domestic companies and mutual funds
As per the existing provisions of the Income-tax, domestic companies that declare, distribute or pay dividends are required to pay a dividend distribution tax. Such a dividend was exempt in the hands of the recipients up to INR 10,00,000. It is proposed to remove the dividend distribution tax payable by companies and tax the dividend from such companies and mutual funds in the hands of the recipients at the tax rates applicable to the respective recipients (i.e. applicable slab rates for individuals.)
7. Enhanced timeline to take a loan to buy home under affordable housing scheme
An additional deduction of INR 1,50,000 was made available in the Finance Act 2019 in relation to interest on loan taken for acquisition of house property for which the stamp duty value does not exceed INR 45,00,000. Such deduction was available subject to satisfaction of specified conditions including that the loan is required to be sanctioned between 1 April 2019 to 31 March 2020. The present budget proposes to extend the timeline for the sanction of such a loan to 31 March 2021.