Income Tax Taxation

Income Tax Changes to be expected in Budget 2020-2021

Assumptions are on high that Finance Minister Nirmala Sitharaman will provide some relief on the personal Income Tax in the upcoming Budget session. The expectations regarding deductions are high though tax rate cuts will hit the revenues. The Governments’ finance in current time is strained and cut on revenues is a significant risk. Experts also believe that the Government to make some twist in the dividend distribution tax and long term capital gains on listed securities.

Basic Expectation in Budget 2020-21

(1) In Income Tax

According to the current tax slab:

• All income up to Rs. 5, 00,000 is taxed at 5%.
• And from ₹5 lakh to ₹10 lakh at the rate of 20%. 

Some rationalization should be carried out in the Budget 2020 to moderate rate of tax, says Saraswathi Kasturirangan, partner with Deloitte India.

 (2) Withdrawal of Dividend Tax

In the present time, a company pays income tax on its taxable profit. According to Ashok Shah,Withdrawal of the DDT will remove the cascading impact of taxation. The Government should tax dividend in the hands of the shareholders at concessional rates”.

• After that, surplus profit is distributed; the shareholder needs to pay Dividend Distribution Tax DT 20.56%.
• The resident non-corporate taxpayers need to pay additional tax at 10%+ applicable surcharge and cess on dividend above 10 Lakh.

(3) Removal on long term capital gains (LTCG) on listed securities and Securities Transaction tax (STT)

According to Ashok Shah of NA Shah Associates, “STT was introduced in 2004 and accordingly long term capital gain on which SST is paid was exempted from tax. In the Union budget of 2018, tax on long term capital gains on listed securities was reintroduced. At the same time, STT was also continued. This had negative effects on the sentiments of investors”.

• Tax on long term capital gains (LTCG) on listed securities and Securities Transaction Tax (STT) amounts to double taxation is the belief of the tax experts.
• Introduction of STT in Union Budget of 2018 brought adverse effects on sentiments of investors.
• “Government should either abolish STT on listed securities or should exempt Long Term Capital Gain on sale of listed securities from tax” added by Ashok Shah of NA Shah Associates.

(4) Roll out some tax sops from Home Loans

The Government can roll out some tax sops for home loans to support the real estate sector. In previous years July budget, The Ministry announced an additional deduction of Rs. 1.5 lakh for interest paid on loan borrowed up to 31st March 2020, for purchase of an affordable house valued up to Rs.45 lakh. The expectation is that:

• All the first time buyers irrespective of the property value avail this tax benefit.
• As said by Kasturirangan of Deloitte India, “The expectation is that this is extended to all first time home buyers irrespective of the property value. This will be a big relief for individuals contemplating to invest in their primary homes.”
• According to Shishir Baijal, Chairman and Managing Director at Knight Frank India, Section 80C of the Income Tax Act^[1] does not provide for a focused benefit on housing. Taxpayers have numerous investment alternatives to choose from, and the lack of exclusive tax benefit on the principal amount of home loans makes them put their home purchase decisions on hold. A separate annual deduction of INR 150,000 for principal repayment will provide the much-needed fillip to opt for home loans and give a fillip to housing sales too.

(5) Increase in benefit under National Pension Scheme or NPS

Pension fund Regulator or PFRDA has demanded an increase in the Income Tax benefit under NPS upto Rs. 1 lakh.

• Currently, deduction can be made as prescribed under Section 80CCD(1B) of the Income Tax Act.
• Investment up to  50,000 in a financial year in Tier I NPS account is eligible for tax deduction.
• In case the contribution contributing towards the NPS account is made by the employer, which is mandatory for government employees (except Armed Forces), an additional deduction of up to 10% of salary that is (basic + Dearness Allowance) irrespective of any limit qualifies for income tax deduction under Section 80 CCD(2).
• The Regulator has requested the Government to extend the facility of tax free contribution of 14% (currently only central government employees are eligible) under the NPS to all categories.
• Employers’ grant of 14% in pension under the NPS for central government employees was made tax free from April 1, 2019.
• For others, it was upto 10% of the employer’s contribution.

Conclusion

The Finance Ministry will take the final decision on tax proposals after completion of pre Budget meetings. The concerned Minister will sign the recommendations after discussion with the Prime Minister. The demand of industry body specifies that income up to Rs 5 lakh should be exempt from tax from the current Rs 2.5 lakh to spur demand for goods and services.