Income tax rules changes effecting from April 1, 2020

The Finance Act received Presidential assent on 27 March 2020. It contains the tax proposals for FY 2020-21, which would be incorporated in the Income-tax Act, 1961.

Income tax rules changes effecting from April 1, 2020
The recent clarifications are in response to certain representations made by the taxpayers.

In the wake of the countrywide lockdown for dealing with the global COVID crisis, India’s Parliament, just before adjourning, enacted the Finance Bill 2020 (FB 2020). The Finance Act received Presidential assent on 27 March 2020. It contains the tax proposals for Financial Year (FY) 2020-21 (i.e. 01 April 2020 to 31 March 2021), which would be incorporated in the Income-tax Act 1961 (ITA).

We have covered below a few key changes relevant for the salaried taxpayers that are applicable from 01 April 2020:

New tax regime

Currently, the ITA comprises of various exemptions and deductions that are available to a taxpayer, subject to certain conditions and limits. In order to simplify the Income-tax law, the finance minister has introduced a new personal income tax regime from 01 April 2020, wherein lower income tax rates will apply for those individual taxpayers who forgo certain deductions and exemptions.

However, before you decide to choose which regime is beneficial, you need to keep in mind the following:

# Option to decide to be taxed under the old / new regime is available every year after ascertaining which regime is more beneficial (except for individuals with income from business / profession);

# To avail the simplified regime, the taxpayer needs to file the return within the applicable due dates;

# Following deductions / exemptions are not available under the simplified tax regime:

1. Deductions for various payments / investments 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. However, employers’ contribution to NPS will be allowed as a deduction;

2. Exemptions such as House Rent Allowance (HRA), Leave Travel Allowance (LTA), and deductions such as standard deduction, profession tax, family pension deduction;

3. Exemption in respect of voucher granted for free food and beverages;

4. In case of self-occupied house property, no deduction for interest paid on housing loan will be available i.e. Further, this loss cannot be set-off against other income or be allowed to be carried forward to future years.

# Senior and very senior citizens are presently availing various benefits like higher slab benefit of Rs 3 lakh and Rs 5 lakh 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 the benefits if they opt for the new simplified tax regime.

As can be seen from the above, the decision regarding which regime should be opted for is dependent on the individual taxpayer based on the deductions / exemptions claimed. For example: For a Pensioner who does not have salary income and does not make tax saving investment, earning income of Rs 15 lakh, he would save tax of Rs 75,000 under the new tax regime. On the other hand, an individual taxpayer earning salary income with HRA, LTA as part of his compensation and making tax saving investments will be better off continuing under the old tax regime, to the extent the deduction / exemption exceeds Rs 225,000.

Residency Rules

While there are many changes carved out in the residential status rules, a significant amendment is that FB 2020 proposed a new residence provision, i.e. that an Indian citizen who is not liable to tax in any other jurisdiction (by reason of his domicile or residence), shall be deemed to be resident in India. This is now relaxed by introducing a threshold on the income (other than income from foreign sources) of Rs 15 lakh and such individuals will be treated as Not Ordinarily resident (they are taxable on income arising outside India from a business controlled in India).

Dividend income from shares / mutual funds

With effect from 01 April 2020, Dividend Distribution Tax (DDT) will be abolished and a traditional system of taxation be followed wherein the shareholders / unit-holders are liable to pay tax on such income at the applicable tax rate. This will mean significant increase in overall tax incidence to high net worth individuals who hold dividend-oriented investments.

Retiral Benefits

Currently, an employer contribution to below retirals are not taxable, up to a certain limit:

# Provident Fund up to 12% of salary
# NPS up to 14% of salary for Central government and 10% of salary for those working in other than Central government
# Superannuation up to Rs 150,000

With effect from 01 April 2020, aggregate contribution in excess of Rs 750,000 to the aforesaid schemes would be a taxable perquisite. Further, annual accretion on these contributions will be treated as perquisite.

(By Alok Agrawal, Partner, Deloitte India, with contribution from Mona Karnavat, Manager, and Charmy Parekh, Deputy Manager with Deloitte Haskins and Sells LLP)

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