Income Tax Taxation

Provision-wise Analysis of Key Income Tax Changes vide Finance Bill 2020: Read full story

The Finance Minister (FM), Nirmala Sitharaman, proposed some income tax changes vide Finance Bill, 2020. Some key provisions of the Income Tax Act, 1961, which are sought to be adjusted by virtue of the budget proposals, include the following: 

Deposit Insurance: 

As per Deposit Insurance and Credit Guarantee Corporation (DICGC), depositors’ money including both principal and interest, is redeemed up to the specified cover limit, if the bank goes bankrupt. This applies to all deposits held in a bank such as current account, savings account, fixed deposits, etc. The Finance Bill, 2020 has set out to increase bank deposit cover in scheduled commercial banks. It has been hiked from present Rs. 1,00,000 to Rs. 5,00,000 per depositor. The increase in insurance limit has majorly been the response to difficulties faced by members of PMC bank, who were unable to withdraw their deposits on the bank’s abrupt closure. Here, the cover of Rs. 5,00,000 is available in respect of every single bank to secure depositors for the aggregate amount of deposits kept in that particular bank.

Income tax changes in Section 44AB: 

One of the important income tax changes in budget 2020 is an increase in the threshold limit of ‘tax audit’ by 5 times. It comes as a relief to medium and small enterprises as only businesses with a turnover of more than Rs. 5 crores (earlier 1 crore) are mandatorily required to get their books of account audited. However, the increased limit shall apply with a pre-condition that not more than 5% of the transactions of such business are carried out in cash during the relevant previous year.  

TDS on fees for technical services:

From 1^st April 2020, TDS on fees for technical services is proposed to be reduced from 10% to 2% under Section 194J of the Income Tax Act. This is applicable only to technical services (other than professional services) for which payment exceeding Rs. 30,000 is made to a resident during a financial year. 

Income tax changes in Section 80EEA:

Under the Finance Act 2019, individuals acquiring house property with a stamp duty value of up to Rs. 45 lakh through a loan, were allowed to claim an additional deduction of Rs 1.5 lakh towards interest payments. Such an ‘affordable housing scheme’ was provided in relation to loans sanctioned during the FY 2019-2020. To give a boost to the housing sector, the benefit of deduction u/s 80EEA has now been extended to FY 2020-21. To cut short, loans sanctioned until 31^st March 2021 will be allowed to exercise the benefit of Section 80EEA. This benefit is over and above the Rs. 2 lakh deduction allowable under Section 24.

Income tax changes in DDT:

One of the most sought-after income tax changes was the abolition of dividend distribution tax. By abolishing DDT, the Finance Ministry has put into place the classical system of taxation wherein dividends are to be taxed in the hands of the recipients at their applicable tax slabs. Small and retail investors shall stand to gain since they may end up paying lower tax as compared to what they were earlier paying on an indirect basis @20.56% effectively. This move will, however, discourage HNIs and wealthy investors from taking a position in high dividend stocks.

Income tax changes for start-ups:

To propel the business of start-ups towards profitability, the Central Government allowed a number of tax reliefs. Startups having a turnover of up to Rs. 100 crores can now claim full deduction on their profits for a period of three consecutive years out of 10 years since the time of incorporation. Under the income tax provisions, previously the eligibility limit was Rs. 25 crores and the lock-in period to avail the tax benefit was 7 years. Moreover, the Finance Ministry has also proposed deferring the tax payments on ESOPs by 5 years or till the employees leave the organization or sell their shares, whichever is the earliest. Earlier, the employees had to pay tax at the time of allotment of securities. This is likely to address the cash flow problem of employees who do not sell their shares immediately and hold for a long-term period.

Our Recommendation: Old vs. New Tax Rates – Whether a taxpayer should choose the new tax regime for FY 2020-21?

TDS on dividends:

Since corporate houses will no longer charge DDT on the circulation of profits to their shareholders, the finance department has streamlined the provisions of TDS on dividends. For dividend paid by Indian companies, to a shareholder, who is resident in India, TDS @ 10% is to be deducted if the dividend amount exceeds Rs. 5,000 during the FY. Also, on dividend paid by mutual funds to a resident, TDS @ 10% will be deducted, only if the dividend amount exceeds Rs. 5,000 during the FY.

Section 194O on E-commerce operators:

With a view to widening the tax base, the participants/sellers of e-commerce platforms would be brought under the tax ambit. For this purpose, TDS @ 1% is proposed to be levied on e-commerce transactions, and this might increase the burden on sellers resorting to e-commerce platforms. Entities owning, operating or managing digital platforms would need to deduct 1% TDS on payment of gross sales amount to their participants, provided the annual amount paid or credited exceeds Rs. 5 lakh. For non-PAN/Aadhaar cases, TDS is to be deducted at 5%.

Income tax changes in Residential status:

Budget 2020 has also brought some amendments in Section 6 pertaining to the determination of residential status of assessees.

• Firstly, it has been provided that a citizen of India shall be deemed to be a resident in India if he is not liable to tax in any other country for a previous year.
• Secondly, an individual being a citizen of India, or a person of Indian origin who, being outside India, comes on a visit to India in any previous year and is present in India for 120 days or more, shall be resident in India. This condition was earlier ‘182 days’.
• Thirdly, an individual or HUF shall be treated as ‘resident but not ordinarily resident’ if he/manager of HUF is a non-resident in at least 7 out of 10 previous years immediately preceding the relevant previous year. This condition was earlier ‘9 out of 10 years’. 

Taxable perquisite:

In respect of the Employee Provident Fund Scheme, National Pension Scheme and approved Superannuation Fund, the Finance Ministry has proposed to introduce an upper limit cap of Rs. 7,50,000 to tax the quantum of the employer’s contribution. Employer’s contributions made in excess of Rs. 7,50,000 during a year shall be taxable as perquisites in the hands of employees. Moreover, annual accretions such as interest, dividend, etc. earned on such accumulated corpus shall also be considered taxable. This move again will impact the high-income earners more.

Vivad se Vishwas – Income tax changes in litigation:

On the success of ‘Sabka Vishwas’ scheme meant for indirect tax litigations which resulted in settling of more than 1,89,000 cases, the Finance Minister has proposed to regularize a similar scheme for direct taxes too. In order to reduce tax litigations standing pending in various tribunals, Budget 2020 has proposed a new scheme called ‘Vivad se Vishwas’. The taxpayers will be needed to pay only the disputed amount of taxes while enjoying a complete waiver of interest and penalty therein. This is, however, subject to the pre-requisite that such taxes get paid prior to 31^st March 2020.

Income tax changes for NGOs:

The validity of registrations of Indian non-government organizations was also altered as part of other income tax changes suggested on 1^st February 2020. Every five years, Indian NGOs will need to renew their registrations under the Income Tax Act to claim a tax exemption. After the expiry of the term of 5 years, they will need to again apply for NGO registration.

Change in tax slab via Section 115BAC and Restrictions on Exemptions:

A significant change has been effected in the existing tax slab rates for individuals and HUFs. The new personal tax rates are as under:

Total Income	Rate of tax
Up to Rs. 2,50,000	Nil
From Rs. 2,50,001 to Rs. 5,00,000	5%
From Rs. 5,00,001 to Rs. 7,50,000	10%
From Rs. 7,50,001 to Rs. 10,00,000	15%
From Rs. 10,00,001 to Rs. 12,50,000	20%
From Rs. 12,50,001 to Rs. 15,00,000	25%
Above Rs. 15,00,000	30%

*Rate of surcharge and cess shall continue to be the same.

The taxpayers are provided with an option to choose between the existing and new tax regimes. The old scheme, as per extant law, may continue to be adopted with full deductions. However, persons opting for taxation under Section 115BAC will have to bear restrictions on approximately 70% of the deductions currently available to them under different chapters and sections. As quoted in the Finance Bill 2020, these include the following:

“(i) Leave travel concession as contained in clause (5) of section 10;

(ii) House rent allowance as contained in clause (13A) of section 10;

(iii) Some of the allowance as contained in clause (14) of section 10;

(iv) Allowances to MPs/MLAs as contained in clause (17) of section 10; 

(v) Allowance for the income of minor as contained in clause (32) of section 10;

(vi) Exemption for SEZ unit contained in section 10AA;

(vii) The standard deduction, the deduction for entertainment allowance and employment/professional tax as contained in section 16;

(viii) Interest under section 24 in respect of self-occupied or vacant property referred to in sub-section (2) of section 23. (Loss under the head income from house property for the rented house shall not be allowed to be set off under any other head and would be allowed to be carried forward as per extant law);

(ix) Additional depreciation under clause (iia) of sub-section (1) of section 32;

(x) Deductions under section 32AD, 33AB, 33ABA;

(xi) Various deductions for donation for or expenditure on scientific research contained in sub-clause (ii) or sub-clause

(iia) or sub-clause (iii) of sub-section (1) or sub-section (2AA) of section 35;

(xii) Deduction under section 35AD or section 35CCC;

(xiii) Deduction from family pension under clause (iia) of section 57;

(xiv) Any deduction under chapter VIA (like section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc). However, deduction under sub-section (2) of section 80CCD (employer contribution on account of the employee in notified pension scheme) and section 80JJAA (for new employment) can be claimed.”

All the above income tax changes or provisions relating to direct taxes as proposed to be amended vide Finance Bill, 2020 can be accessed from Finance Bill 2020 – Income Tax Provisions

Also, Read: Abolition of Dividend Distribution Tax and impact of its Taxability in the Hands of the Recipient