The Union Budget 2020-21 saw a major announcement by the Central Government with regard to the taxation system for individual taxpayers. Now, there is an old regime and new regime in place, any of which can be chosen by taxpayers while filing their returns. Which one should you pick? Here’s shedding some light on the matter to help you choose.
A new personal income tax regime has been announced for those earning up to Rs. 15 lakh annually. However, you can only choose the same if you opt to forego claims for deductions and other exemptions including standard deduction, investments in PPF, PF, LIC, medical insurance, HRA, LTA and also for setting off losses from house property and other such losses. DDT (Dividend Distribution Tax) has also been eliminated with dividends being taxable in hands of recipients at the rates of the income tax slabs. TDS of 10% will also apply on the dividends paid to individuals which are more than Rs. 5,000 in a financial year. This will naturally prove beneficial for smaller taxpayers who are subjected to lower slab rates of taxation as compared to applicable rates of DDT.
Some key aspects worth knowing
The employer’s contribution to the NPS (National Pension System), provident fund and superannuation fund, surpassing Rs. 7.5 lakh annually, will be taxed as the salary in the hands of the respective employees. Interest dividends and similar incomes from contributions exceeding this sum will also be taxed. This will lead to higher taxes for HNWIs. Payment of taxes on ESOPs received by company employees from eligible startups will be deferred. This tax will be paid upon completion of 5 years from the year of share allotment/sale of shares/cessation of employment, whichever comes earlier.
Additionally, no adjustments can be made to the sale consideration on the transfer of immovable properties in cases where variations between sale consideration and stamp duty value do not exceed 10% of the former. This was 5% previously. This will provide some much-needed relief to home buyers. Details of donations eligible under Section 80G will be pre-filled in the ITR on the basis of information provided by the charitable organization in question. However, claims may not be allowed in case proper details are not provided.
Vivaad se Vishwas will be a scheme where taxpayers can settle the disputed tax amounts on the 31st of March, 2020 or before this date. They can also pay disputed amounts by the 30th of June, 2020 with an additional levy. In place of Form 26AS as the annual statement of taxes, taxpayers can file taxes with a more extensive financial statement including information like share transactions, details of TDS, purchase or sale of immovable properties and so on. This will help you reconcile details in tax returns with details available with the portal.
First time home buyers will get an extra Rs. 1.5 lakh in deductions on interest repayments for housing loans for properties with stamp duty value of Rs. 45 lakh. This has been extended to the 31st of March, 2021. Traveling to foreign countries without deduction of TDS from tour operator payments or foreign remittances under LRS will have to be carefully scrutinized. Tour operators will be collecting TDS at 5% and in case PAN/Aadhar is not given, this will rise to 10%.
Personal income tax slabs
In the new regime, taxpayers will be paying zero taxes for annual income up to Rs. 5 lakh. Income between Rs. 5-7.5 lakh will be taxed at a rate of 10% and Rs. 7.5-10 lakh will be taxed at 15%. Additionally 20% will be the tax for Rs. 10-12.5 lakh and 25% will be the tax for Rs. 12.5-15 lakh. Income exceeding Rs. 15 lakh will attract a taxation rate of 30%. Although optional, if you choose the new tax regime, you will have to go without various exemptions provided in the previous taxation regime.
You should thoroughly compare your actual savings on taxes in the old regime with the expected savings in the new regime to get a clearer picture. It is slightly confusing since incentives on home loan EMIs, insurance investments, PPF, et al will not be allowed in the new regime. Yet, if you subscribe to NPS (National Pension Scheme), you will continue availing of exemptions under Section 80CCD (2) in case the employer is contributing to the NPS account. The deduction of NPS of 10% from the employer is the sole tax benefit in the new regime since Section 80CCD (2) has been independently maintained. Those with salary of Rs. 15 lakh or more may choose NPS more in the current scenario.
In the previous regime, the tax structure was 20% for income between Rs. 5-10 lakh and 30% for Rs. 10-15 lakh while no tax was payable for income up to Rs. 5 lakh. However, there were exemptions available up to Rs. 1.5 lakh under Section 80C including home loan principal repayment, PPF investments, life insurance investments, PF and the like. There were also deductions like HRA, standard deduction, LTA and so on. Additionally, there were deductions on health insurance investments along with home loan interest repayments. So you will have to factor these in before you take a concrete decision. Consult a financial advisor if necessary before filing your returns in the new financial year.