The Finance Minister has announced various compliance relief measures for individual taxpayers amidst the COVID-19 crisis. Some major changes have been introduced to the Income Tax rules for the Financial Year 2020-21.
Budget 2020-New Tax Regime
As announced in Budget 2020, the new tax slab, as well as the old tax slab will be in effect, giving the taxpayer an option to choose between the two slabs.
As per the new tax rates, income up to Rs 2.5 lakh is exempted from paying tax.
5% tax bracket for income between 2.5 lakh and up to 5 lakhs.
10% tax bracket for income between 5 lakh and up to 7.5 lakh.
15% tax bracket for income between 7.5 lakh and up to 10 lakhs.
20% tax bracket for income between 10 lakh and up to 12.5 lakh.
25% tax bracket for income between 12.5 lakhs and up to 15 lakhs.
30% tax bracket for income above 15 lakhs.
Before deciding on the tax regime, the taxpayer should keep certain things in mind. The income tax return needs to be filed within the given due dates to avail of the new tax regime. The benefit to decide to be taxed under the old tax slabs or new tax slabs can be made use every year after ensuring which regime is more beneficial (except for individuals with income from business/ profession).
Under the new tax regime, the following exemptions and deductions may not be applicable:
- Payments/investment deductions covered under chapter VIA of ITA such as life insurance premium, Mediclaim premium, principal repayment of housing loan, tuition fees, employee’s contribution to EPF, PPF contribution, etc, although the employer’s contribution to NPS will be allowed as a deduction.
- Deduction for interest paid on housing loans will not be available for self-occupied house property. Also, this loss cannot be set off against other income or be allowed to be carried forward to future years.
- Exemptions such as HRA, LTA, and deductions such as standard deduction, professional tax, family pension deduction will not be available.
- Senior and super senior citizens currently enjoy various benefits such as higher slab benefits of Rs 3 lakh and 5 lakhs respectively, higher deductions for Mediclaim, and interest on saving and fixed deposit which is available only under the old tax regime. They will have to let go of these benefits if they opt for the new tax regime.
Major changes made in Income Tax Rules
- Generally, the last date for filing ITR is July 31. The due date has now extended to November 30, 2020. So, the returns to be filed by July 31, 2020 and October 31, 2020, can be filed up to November 30, 2020. Also, the date for the furnishing tax audit report also been extended to 31st October 2020.
- Another change made to the income tax rule is that no tax is levied on notional income. Until last year, an individual who owns a second house property that lay vacant had to pay the taxes for the notional rent from the property. But in this fiscal year, no tax will be levied on notional income.
- As per the new income tax rule, TDS will only be applicable if the interest from Fixed Deposits (FDs) and Recurring Deposits (RDs) is more than Rs. 40,000 a year. Till last year, the bank debited 10 percent TDS if the interest from FDs and RDs was more than Rs. 10,000 a year.
- Dividends received from mutual funds and domestic companies will be taxable under the new tax regime. For instance, dividends earned from the mutual funds will be taxed at the individual taxpayer’s slab rates. Earlier, the dividend was tax-free, but the mutual funds deducted a dividend distribution tax (DDT) at a rate of 11.2 % for equity-oriented funds and 29.12% for debt-oriented funds.
- The new tax regime will increase the tax burden on investors on higher tax slabs while lowering the burden on individuals in low tax slabs. Also, TDS at the rate of 10% will be levied if the dividend received by an investor exceeds Rs.5000 in a financial year.
- If you are purchasing a house property for the first time and if the value is up to Rs. 45 lakhs, the government has extended the date for availing additional tax benefits by a year to March 31, 2021. House owners who have taken a loan up to Rs. 45 lakhs will be eligible to claim an additional tax deduction of Rs. 1.5 lakhs on interest in addition to the existing deduction of Rs 2 lakhs. Earlier, this deduction was allowed on housing loans sanctioned on or before March 31, 2020.
- The new tax regime allows deferment of tax payment on shares allotted to employees of startups under ESOPs or employee stock ownership plan. The new tax regime has deferred the tax payment from the exercise date to 48 months after exercise cessation of employment or sale of shares. At present, ESOPs are taxable when the vested options are exercised by the employees.
Young individual taxpayers may be the ones who can enjoy the benefits of the new tax regime as they would not be committed to recurring expenses like insurance, tuition fees of children, etc. The same can be said of senior citizens as well. The availability of NPS deduction under both the tax regime will definitely continue to provide some relaxation.
Hence, it is up to the individual taxpayer based on the deductions/exemptions that can be claimed, and his/her specific case to opt for either the new tax regime or stay with the old one.