Income Tax 01 Feb,2020
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Budget 2020 – key changes impacting individual taxpayers
Akhil ChandnaDirector - Tax, Grant Thornton

On personal taxation front, the key expectation from Budget 2020 was to reduce the slab rates and surcharge, increased returns on investment from elimination of distribution taxes and increase in the eligible limits for various deductions. The government has delivered a mixed bag for individuals and there is much to be seen in the fine print. Discussed below are some of the amendments that directly impacts the individuals:

Dividend Income

The taxability of dividend income distributed by Indian companies has undergone many changes over the last decade. A scheme for payment of Dividend Distribution Tax (DDT) by companies was introduced in the Finance Act 2003 wherein companies were required to pay tax on the dividends being distributed. At the same time, dividend was made exempt in the hands of the taxpayer. Subsequently, Finance Act 2016 re-introduced taxation in the hands of recipient, albeit with taxability triggering on dividends above Rs 10 lakh. This Budget has removed the framework of DDT and restored the classic system of taxing dividend in the taxpayer's hands. Hence, with effect from Financial Year 2020-21, any amount received as dividend would be taxable as per the slab rate applicable to the taxpayer. Also, the domestic company would be required to deduct tax at source at the rate of 10% where the dividend exceeds Rs 5000.

New scheme of personal tax rates

The Finance Bill 2020 has introduced a new scheme of tax rates for individuals and HUF, providing an option to pay taxes at reduced tax rates from FY 2020-21 subject to certain conditions. The key condition is foregoing specified deductions/exemptions, which is in line with the option provided to domestic companies to pay tax at reduced rates without availing any exemption/deductions. Some of the predominantly availed exemptions/deductions that would need to be given up include Leave Travel Concession (LTC), House Rent Allowance (HRA), Standard deduction, Interest on housing loan for respect of self-occupied property, deductions of up-to Rs 1.5 lakh available for specified investments/expenses availed under the popular section 80C, donations to charitable organisations, deduction for medical insurance premium, etc.

A comparison of the existing tax regime versus the proposed optional regime has been tabulated below:

Existing slab rate Tax rate Optional scheme - Tax rates
Upto 2,50,000 Nil Nil
2,50,000 - 5,00,000 5% 5%
5,00,000 - 7,50,000 20% 10%
7,50,000-10,00,000 20% 15%
10,00,000-12,50,000 30% 20%
12,50,000-15,00,000 30% 25%
Above 15,00,000 30% 30%

In case of individuals with business income, the option once exercised for a financial year shall be valid for that year and all subsequent years. Individuals who do not have any income from business or profession can exercise the option to avail lower tax rates every year. Therefore, individual and HUFs would need to determine the tax liability under the existing tax rates vis-à-vis new scheme and then select the best option.

Changes in determining Residential status

As per the current tax laws, an Indian citizen or a person of Indian origin (PIO), staying outside India visits India is not considered as resident if the stay in a tax year is less than 182 days. The Finance Bill 2020 has reduced this threshold to 120 days. Therefore, Indian citizens/PIO's visiting India for long stays period for any purpose would need to carefully evaluate their residential status, else they may stand to qualify as a resident in India.

A resident is further categorized as 'ordinary resident' and 'not-ordinary resident' and the tax liability in India differs for both categories. Broadly, an ordinary resident is taxable in India on his global income whereas a 'not-ordinary resident' is not taxable in India for income that arises outside India. The Finance Bill 2020 has amended the criteria for qualifying as a 'not-ordinary resident' in India. A person would now qualify as a 'not-ordinary resident' if he has been a non-resident in India in 7 out 10 preceding tax years (erstwhile conditions included being non-resident for 9 out 10 preceding tax years or stay in India less being than 729 days in preceding 7 tax years). This amendment would directly impact and necessitate evaluating the residential status of expatriates working in India or Indians moving outside India.

The Finance Bill 2020 also proposes to bring a new clause for considering Indian citizens as resident of India if they are not liable to tax in any other country by reason of residence, domicile in such country. This amendment may bring many Indian citizens settled abroad, who otherwise qualified as non-resident, to now fall with the Indian tax regime. Another point that would merit serious consideration.

ESOPs for start-ups

As part of long-term incentive schemes, start-up companies provide employee stock options (ESOPs) to retain the highly talented employees and make them participate in the equity growth of the Company. ESOPs are taxable when the vested options are exercised by the employees. However, at the time of exercise, the employees face cash flow crunches as there is no inflow of income but there is a requirement to pay taxes on the accrued benefit. To provide a relief to such employees, the Finance Bill 2020 has deferred the tax payment event from the exercise date to 48 months after exercise, cessation of employment or sale of shares, whichever is earliest. Similar difficulties are also faced by employees in companies other than start-ups and the Government may consider extending the benefit for all companies.

Taxability of Employer contribution's

Under the existing provisions of the Act, the contribution by the employer to the account of an employee in a recognized provident fund exceeding twelve per cent of salary is taxable. Further, the amount of any contribution to an approved superannuation fund by the employer exceeding one lakh fifty thousand rupees is treated as perquisite in the hands of the employee. Similarly, the assessee is allowed a deduction under National Pension Scheme (NPS) for the 10% per cent of the salary contributed by employer. However, there is no combined upper limit for the purpose of deduction on the amount of contribution made by the employer.

The Finance Bill 2020 proposes to tax where the contributions under all these funds exceeds INR 750,000 in aggregate. Hence, employees with high salary income may need to revisit their salary package where the benefit was fully availed. Further, the Bill also proposes to tax the accretions from such funds in excess of INR 750,000 when such benefit accrues.

Extension of time limit for sanctioning of loan for affordable housing:

The existing provisions provides deduction of INR 150,000 in respect of interest on loan taken from any financial institution for acquisition of an affordable residential house property (wherein the assessee does not own any residential house property on the date of sanction of loan).

One of the conditions is that loan has been sanctioned by the financial institution during the period from 01 April, 2019 to 31 March, 2020. In order to continue promoting purchase of affordable housing, the period of sanctioning of loan by the financial institution is proposed to be extended to 31 March, 2021.

Conclusion

While reduction in slab rates is a welcome development, however they have come at the cost of foregoing certain exemptions and deductions. Although it is likely that the reduced rates will save taxes for individuals in middle class families, the option of availing exemptions and paying taxes on reduced income can continue to have relevance and require evaluation. Also, with modification of tax residency rules, HNIs and mobile population needs to evaluate their residential status diligently. Overall, a well-balanced act with many changes for salaried class taxpaying constituency.

Akhil Chandna, Director at Grant Thornton India LLP with inputs from CA Ridhi Sanghvi