BUDGET 2020 Tax Rates & other proposals applicable to Individuals & HUFs

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Tax rates for Individuals/HUF

Resident individual aged above 60 years but less than 80 years

Resident individual aged above 80 years

Other Individuals and HUF

Surcharge applicable to Individuals / HUF

*surcharge on income taxable under sections 111A and 112A would be restricted to 15%

Optional tax regime – Section 115BAC

An alternative conditional personal income-tax regime has been proposed. This would be available as an option to the above existing tax regime for individuals and HUFs. The tax slabs applicable under the proposed regime are as under:

Conditions for opting to the new tax regime

1)     The new scheme is optional and the assesses will have to opt for being covered by the new scheme in the prescribed manner:

a)     Where such individual or HUF does not have business income, the option is to be exercised for every year along with the filing of the return of income under section 139(1) for the year.

b)    Where such individual or HUF has business income,

i)      the option is too exercised on or before the due date of filling the return of income and such option once exercised shall apply for that previous year and to all subsequent years.

ii)     and such assessee has opted to be governed by the new scheme, then, subsequently, he can opt out only once and thereafter, he will never be eligible to opt for the new scheme again except when he ceases to have any business income.

2)     The above concessional tax rates can be opted after foregoing certain exemptions / deductions such as:

a)     Leave Travel concession – section 10(5)

b)    House Rent Allowance – section 10(13A)

c)     Specified allowances exempt under section 10(14) (allowances granted to employees other than transport allowance, conveyance allowance, per-diems and travel and transfer allowance as mentioned in the Explanatory Memorandum)

d)    Allowances to MPs / MLAs- section 10(17)

e)     Clubbed Income of minor upto Rs.1,500- section 10(32)

f)     Exemption for unit in SEZ- section 10AA

g)    Standard and other deductions (including profession tax) from salary – section 16

h)     Interest in respect of Self-Occupied Property- section 24(b)

i)      Set off loss under the head income from house property against other heads – section 71

j)      Additional depreciation – section 32(1)(iia)

k)     Deduction under sections 32AD, 33AB and 33ABA

l)      Specified deduction for donations or for expenditure on specific research – section 35(1)(ii) (iia) (iii) or section 35(2AA)

m)   Weighted deduction for expenditure on specified business / agricultural extension project- sections 35AD and 35CCC

n)     Standard deduction for family pension –section 57(iia)

o)    Deduction under chapter VI-A (such as section 80C,80D.80 TTA,80TTB,80G,etc.) other than the following:

i)      80CCD (2) – employer’s contribution in notified pension scheme

ii)     80JJAA – employment of new employees

iii)    80LA-IFSC Centre

p)    Exemption in respect of vouched granted for free food and Beverages to employees, as mentioned in Explanatory Memorandum.

q)    Any exemption or deduction for allowances or perquisites provided under any other law.

3)     There is no separate higher threshold for senior and very senior citizens in the optional scheme.

4)     Surcharges and Cess remain unchanged

5)     Once this option is exercised, provisions relating to Alternate Minimum Tax and credit relating to the same will not be applicable. For this, amendments have been made in sections 115JC / 115JD.

If an assessee does not opt for the new scheme, he will continue to be governed by the existing regime. the slabs, tax rates and surcharge as applicable to individuals and HUFs have remained unchanged.

The following is a comparative analysis of these alternative regimes:

Abolition of Dividend Distribution Tax (DDT)

Currently, distribution of dividends by a domestic company is subject to an additional income tax, called Dividend Distribution Tax (“DDT”), on the distributing company at an effective rate of 20.56% (including surcharge and cess). Such tax is treated as the final tax on dividends and such dividends are exempt from taxation in the hands of the investors. Similar, regime also exists for taxing distributions made by mutual funds to its unit holders.  Additionally, Resident shareholders (other than domestic companies and specified trusts/ institutions) receiving dividend exceeding Rs.10 Lacs in a year, are subject to tax at10%.

In order to change the incidence of taxation from the company/mutual fund to the shareholders/ unitholders, the Bill proposes to abolish the DDT regime and re-introduce the classical method of taxing dividends. Under this proposal, dividends will be directly taxed in the hands of the shareholders/unit holders and the company/mutual fund would be required to withhold applicable tax on the same, proposed at 10% for residents and 20% for non-residents.

Dividend income would be taxable at normal rates.  Shareholders/ unitholder shall be allowed deduction of interest expense subject to maximum of 20% of such income. No other expenses shall be allowed. 

Changes in Tax-Residency Rules

Currently, an individual’s residential status is determined based on his / her physical presence in India. An individual who is present in India for a period exceeding 60 days in the relevant FY or for a period of 365 days or more in the 4 years preceding that year is treated as a resident.

For Indian citizens and persons of Indian origin (“PIOs”), the period of 60 days currently stands at 182 days, allowing such persons to visit India for longer duration without being subject to the burden of tax as a tax resident of India. The Bill proposes to decrease the period of 182 days to 120 days with an intention to curb the practice of misusing the higher threshold.

Further, noting that high net worth individuals could be managing their affairs such that they are not liable to tax in any jurisdiction, the Bill proposes that an Indian citizen who is not liable to tax in any other country by reason of domicile or residency or any other criterion of similar nature, would be deemed to be resident in India and taxed on their income in India and out of Indian business or profession.

The IT Act has a provision in respect of an individual and HUF such that if an individual or a manager of a HUF has been non-resident in 9 (nine) out of the 10 (ten) FYs preceding the relevant FY, or has not been in India for an overall period of 729 days during the seven FYs preceding that FY; such individual or HUF is treated as a ‘not ordinarily resident’ of India in the relevant FY. When a person is not ordinarily resident in India, his/her/its worldwide income would not be taxable in India. This provision provided a major relief to returning Indians who need the flexibility to take a decision of staying in or returning outside India. In a bid to provide greater flexibility, the Bill proposes to relax the threshold of 9 out of the 10 FYs to 7 out of the 10 FYs years, preceding the relevant year. The second condition of not exceeding presence in India of 729 days in the previous seven FYs has been removed.

Cost of acquisition of the properties acquired before 2001 shall either be the fair market value or the actual cost 

Under the existing provisions of the IT Act, the cost of acquisition of land and buildings which are acquired before April 01, 2001 is either the actual costs or the fair market value, whichever is higher. 

The Bill now proposes that fair market value referred therein shall not exceed the circle rate (i.e. stamp duty value). It is worthwhile to note that certain taxpayers had earlier inflated the cost of acquisition by adopting the value determined by the valuation officer as a fair market value. To plug this loophole, the Bill provides that fair market value shall not exceed the circle rate as on April 01, 2001.

Tax treatment of employer’s contribution to certain funds

As per the existing provisions of IT Act, the employees are eligible to claim deductions on account of the following contributions made by the employers viz. (a) upto 12% of employee’s salary in a recognized provident fund; (b) upto Rs.1.5 Lacs in the superannuation funds; and (c) upto 10% of salary towards national pension scheme (NPS).

It is now proposed to provide a combined upper limit of Rs.7.5 Lacs in respect of employer’s contribution in above funds and any excess contribution shall be taxable in the hands of the employee.  Any annual accretion to these funds by way of interest, dividend or any similar nature shall be treated as perquisite to the extent it relates to the employer’s contribution in excess of Rs.7.5 Lacs.

Amendment to Section 80EEA of the IT Act

Section 80EEA of the IT Act pertains to deduction in respect of interest on loan taken for residential house property (stamp duty value not exceeding Rs.45 Lacs) from any financial institution up to Rs.1.5 Lacs. Further, the said deduction is available for the loan sanctioned by the financial institution during the period beginning on April 1, 2019 and ending on March 31, 2020.

It has been proposed to amend Section 80EEA of the IT Act to extend the deduction to loan sanctioned upto March 31, 2021.

[References: Union Budget 2020-21 Booklet published by Bombay Chartered Accountants Society; Union Budget Highlights published by Wolters Kluwer-Cyril Amarchand Mangaldas; Union Budget Analysis 2020 by ELP; Union Budget Analysis 2020 by N.A. Shah Associates LLP]