Personal Taxes - Budget generates more heat than light

Here are some key takeaways from the Union Budget 2020 on the personal taxation front.

February 03, 2020 11:37 IST | India Infoline News Service
Union Budget 2020
After the Union Budget was presented, the market is still not clear whether the announcements on the personal tax front are beneficial or otherwise. The dual tax regime is especially confounding, even though the FM has shown the intent to make life easier for the taxpayer. Here are some key takeaways.

Get ready for a dual direct tax regime

Yes, that is what it is going to be. Like the corporates, individuals can also choose whether they want higher tax rates with exemptions (old regime) or lower tax rates without exemptions (new regime). Here are the new tax rates applicable for individuals.
Income Level Old Tax Rate New Tax Rate
Up to Rs2.50 lakhs Nil Nil
Rs2.50 lakhs to Rs5 lakhs 5% 5%
Rs5.00 lakhs to Rs7.50 lakhs 20% 10%
Rs7.50 lakhs to Rs10 lakhs 20% 15%
Rs10 lakhs to Rs12.5 lakhs 30% 20%
Rs12.5 lakhs to Rs15 lakhs 30% 25%
Above Rs15 lakhs 30% 30%
Source: Budget Documents

Two things emerge from the above table. Firstly, there are a lot more granular slabs that will be applicable in the new regime so clearly people earning up to Rs15 lakhs should get some additional tax benefit. But, here is the catch. If you opt for the new tax regime, you forfeit most of the tax exemptions that you are currently enjoying. That means, you forfeit your tax exemptions under Section 80C, Section 80D and even your benefits under LTA, HRA and standard deduction. You need to look at the impact of the regime in this context. The new regime will mean that, except for CPF and gratuity, you lose exemptions on all other investments including medical insurance, PPF, life premiums, ELSS and tuition fees paid for children. That is almost like an invitation to stop planning and start spending. In a nutshell, 70 out of the 100 exemptions will be out in the new regime.

DDT scrapped, dividends will be taxed as other income

The good news is that companies will no longer deduct dividend distribution tax (DDT) before paying out dividends. DDT was, prima facie, unfair because it hit the small and large investors alike. It was a steep cost because while the rate was 15%, the effective cost of DDT came to 20.56%. But, this move could be negative for large equity investors and promoter groups who may have to shell out tax at close to 43% on their dividend income. Of course, the government will end up collecting a huge sum by way of dividend tax, but how it impacts the enthusiasm of companies to declare dividends, remains to be seen. There is also ambiguity on the buyback tax front since it was introduced in lieu of the DDT on equity dividends. Whether it continues or gets scrapped, remains to be seen.

Disappointment on the LTCG tax

Normally, budgets are judged by their announcements, but Budget 2020 was also judged by its silence. There had been popular demands for the abolition of long term capital gains tax on equities. It had been introduced in 2018 and had hardly contributed anything substantial to the revenue coffers of the government. But, this LTCG was largely distorting returns, especially in case of equity mutual funds held for long periods of time. However, that anomaly continues and that was a disappointment for the markets.

Tax break on affordable homes extended

It may be recollected that the government had announced a special tax incentive of Rs1.50 lakhs per annum on low cost houses, over and above the existing benefit of Rs2 lakhs under Section 24 of the Income Tax Act. Now, that benefit has been extended by one more year till March 2021. However, it must be noted that this benefit will not be available if you opt for the new tax regime. Hence, make your choices carefully.

Compliance norms made tighter for NRIs

The government had observed that the extent of usage of the Liberalized remittance System (LRS) had substantially increased in the previous year. It is felt that this is also because the NRI facility was being misused by many individuals. To plug the loopholes, the government has decided to change the condition for being classified as an NRI. The number of days the NRI will have to be in the country has been reduced from 182 days to just 120 days. This will make it harder for NRIs to indulge in tax arbitrage.

Rationalizing the taxation of ESOPs

Employee stock option plans (ESOPs) are normally given by companies in soft skill industries or by start-ups to incentivize the employees to take a long term view of associating with the company. Over the years, it has been instrumental in wealth creation but taxation has been a vexing issue. Currently, ESOPs are taxed in the hands of the employee as a perquisite when the option is exercised. The latest budget has deferred this tax payment by 5 years. However, this will subject to the condition that the employee does not leave the organization or sell shares; in which case that will be the taxable date.

Vivaadh se Vishwaas tak

If you are not too good in the nuances of Hindi, this basically is about building a relationship of trust between the tax department and the tax payer. As a special case, the Budget has offered waiver of all interest and penalty in disputed cases where assessees agree to pay the base tax by March 31, 2020. In addition, the budget has also taken steps to move towards faceless appeals in addition to faceless scrutiny to make the process fair and neutral.

At the end of the Budget, only one question remains. Has the Budget inadvertently encouraged spending at the cost of savings and investment. That is something time will tell.

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