Budget 2020: New Tax Slabs, Tax on Dividend, Employer Contribution to
NPS/EPF And Some Mess for NRIs
The Finance Minister presented the Union Budget 2020 on February 1,
2020. Here are the key New Taxighlights of the Union Budget from personal tax
perspective.
There have been quite a few changes this time around. Therefore, divided
the post into 5 broad sections.
1. Change in Income
Tax Slabs
2. Change in Mutual
Fund Taxation (includes dividend taxation and sidepocketing)
3. Change pertaining
to taxation of Employer Contribution to NPS, EPF and Superannuation Fund
4. Changes pertaining
to NRIs
5. ESOPs, Home Loan
Tax Benefits and others
Income Tax Slabs for FY2020-2021
#1 New Income Tax Slabs, New Tax Rates and a Choice
The income tax slabs have been restructured. There is a reduction in
income tax rates too. However, all this comes with a choice to the taxpayer.
What is the choice?
1. Take Deductions and
stick with the old tax slabs.
2. Don’t take
deductions and opt for new tax slabs.
What are the old and new tax slabs?
Do note old tax
slabs are linked to the age of the taxpayers. There is relaxation available to
senior (>=60 years) and very senior citizens (>=80 years). As I see, the
new tax slabs are the same for everyone, irrespective of the taxpayer age.
The new tax slabs look better. The tax rates are lower. However, if you
want to opt for the new tax slabs, you can’t take various income tax deductions
under Section 80C to Section 80U. You shouldn’t have any business income during
the year.
What are the deductions that you must let go?
Almost everything. Here is the list (and it is not comprehensive).
1. Standard deduction
of Rs 50,000 (only for the salaried)
2. 5 lacs under
Section 80C (Life Insurance, PPF, EPF, ELSS, 5-year FDs, etc)
3. Up to Rs 2 lacs for
home loan interest payment under Section 24
4. Rs 25,000 for
health insurance premium payment under Section 80 D (can be more if you are a
senior citizen or are paying premium for your parents)
5. Rs 50,000 under
Section 80CCD(1B) for investment in NPS
6. Interest on
education loan under Section 80E
7. Everything that
falls under Section 80C to Section 80U
8. Benefit of Leave
Travel Allowance (LTA) under Section 10(5)
9. Benefit of House
Rent Allowance (HRA) under Section 10(13)
10. Benefit for
interest payment on housing loan under Section 24 of the Income Tax Act
There are a few deductions/exemptions that are still allowed under the
new regime. One is under Section 80 CCD(2) for employer contribution to NPS.
The other is conveyance allowance to divyang employees.
You can see you are letting go of a number of deductions if you want to
go with the new income tax slabs.
Which is a better choice?
Depends on the deductions you are taking. Here are a few examples.
In the above table, I have highlighted the various break-even points in
terms of deductions in blue. Therefore, if your actual deductions are greater
than the break-even points, you should stay back in the old regime or else you
should opt for the new tax slabs.
If your income is above Rs 15 lacs or above, you are better off with the
new regime if the deductions are up to Rs 2.5 lacs in a financial year. If your
deductions are greater than Rs 2.5 lacs, you are better off sticking with the
old tax slabs.
With the new proposal, everything becomes so complicated. As I see, the
intention is to move to a simplified structure eventually where there is no
concept of deductions. I think the Government merely wants to test waters with
this hybrid structure.
Mutual Funds Taxation
#2 Dividend now taxable in the hands of the investor
Until now, dividends given by the companies or the mutual funds were not
taxable in the hands of the investor. However, the companies or the mutual fund
company deducts DDT (dividend distribution tax) before paying the dividend to
the investors.
The effective tax hit was ~20.6% for the dividend distributed by the
companies while it was ~11.5% and ~28% in case of equity and debt mutual funds
respectively.
Now, DDT has been done away with. The dividend shall now be
taxable in the hands of the investor at their marginal tax rates. With
DDT, everyone was taxed at the same rate that the Government thinks is unfair.
This benefits those in the 0% or 5% tax brackets and adversely affects
the investors in the 30% tax bracket.
Moreover, there will be TDS on dividend paid to investors. If
the dividend to be paid to a resident exceeds Rs 5,000, there would be
deduction at 10%. Do note this TDS is different from DDT. If excess
TDS has been deducted, you can claim it back at the time of filing ITR. There
was no such concept in case of DDT.
For equity funds, if you are in 0% or 5% tax bracket, you are better off
investing in dividend schemes. I assume you are reinvesting the dividends.
Further, I am discounting the exemption of Rs 1 lac on LTCG on sale of equity.
That will complicate matters. If you are in the higher income tax brackets,
growth is clearly a better choice.
For debt funds, if you want to exit before 3 years, there is no
difference between growth and dividend. You must pay tax at your marginal tax
rates. If you plan to sell after 3 years, the dividend scheme is a better
choice if you are in 0% or 5% tax brackets. Growth is a better choice if you
are 20% or 30% tax brackets.
By the way, there are so many tax brackets now, you need to think
through and make a choice. Moreover, the level of indexation will also play a
role and you won’t know about growth in CII upfront.
#3 Clarification on taxation of Segregated Portfolios (Sidepocketing)
Until now, there was a lack of clarity about how the holding period for
side-pocketed investments will be calculated.
From the date of your original investments or from the date of side
pocketing (creation of segregated portfolio)?
The Union Budget puts such doubts to rest. The date of
investment shall be considered for the calculation of capital gains. For
calculation of the cost of acquisition, you must make certain adjustments. This
is best explained with the help of an example.
For instance, if you bought 1 unit for Rs 100 four years back. Just
before sidepocketing, the NAV was Rs 140. Thereafter, 10% of the portfolio was
put in a segregated portfolio. NAV of the main portfolio goes down to 126.
Cost of acquisition of the segregated portfolio shall be considered =
100* 10% = Rs 10 (since 10% of the portfolio was side pocketed)
Cost of acquisition of the main portfolio unit shall be considered as
100 -10 = Rs 90
The date of the acquisition for the main portfolio and the segregated
portfolio units shall be the actual date of investment.
Btw, the above comes into picture only when you sell the units of the
segregated portfolio or the main portfolio.
I am still not very clear how the income returned from the segregated
portfolio will be considered. That may be considered dividend and taxed
accordingly (now as per your tax slab). Again not very sure.
Employer Contribution to NPS, EPF and Superannuation Funds
#4 Upper Cap on Tax-Free Employer Contribution to NPS and EPF
Until now, there was no absolute cap on the tax-free employer contribution to
EPF or NPS accounts of the employee. The caps on the tax-free contribution were
expressed as a percentage of basic salary (and were not absolute). For
instance, for non-central government employees, the cap on tax-free employer
contribution to NPS account was 10% of the basic salary.
Now, employer contribution to NPS, EPF and the superannuation
funds in excess of Rs 7.5 lacs will be taxable. Not just that, even
the interest or returns earned on such excess amount will now be taxable.
I don’t know how the tax accounting will be done especially if you are
contributing to more than one of these. By the way, the cap of Rs 7.5 lacs is
the combined cap for all three.
NRI Related Matters
#4 Definition of NRI changed
As per the current definition, you
are a tax Resident (resident as per the Income Tax Act) if you satisfy any of
the above 2 conditions.
1. You are in India
for 182 days in the financial year; OR
2. You are in India
for 365 days in 4 preceding financial years AND 60 days in the
financial year
The above definition remains. Just that there was an exception to this
definition. Now, that exception has been modified.
For Indian citizens and PIOs staying abroad visiting India, 60 days in
condition 2 was replaced by 182 days. Under the current proposal, this
exception of 182 days is now reduced to 120 days. Thus, if you stay
abroad and want to avoid becoming a tax-resident for the financial year, you
will now have to reduce your duration of stay in India.
This can be messy for Merchant Navy people.
#5 Definition of RNOR relaxed
As per the current rules, you are an RNOR if you
satisfy ANY of the following conditions:
1. You have been an
NRI in 9 out of 10 years preceding the financial year under consideration. OR
2. You have been in
India for no more than 729 days during 7 previous years preceding the financial
year under consideration.
As per the budget proposal, 9 out of 10 years in condition 1 will
change to 7 out of 10 years. This is a favourable move. Remember,
RNOR do not have to pay tax on their global income in India.
#6 Plugging Tax loopholes for NRIs
This can be big blow to many NRI taxpayers who time their stay to avoid
paying taxes anywhere.
Any Indian Citizen, who is not tax resident in any other country, shall
be deemed to be tax-resident in India. For such taxpayers, their global income
will be taxed in India. Many will find this rule quite onerous.
Do note, even NRIs will have to subject their entire global income to tax in
India if they are not a tax-resident anywhere.
As I understand, if you are in tax jurisdiction where taxes are zero,
you don’t have to worry. It is not about zero taxes but about not being a tax
resident anywhere.
The Government has provided some clarification in
this matter. Not sure what they mean. Income generated in India was
anyways taxable in India.
Need to wait for greater clarity in this matter.
#7 TCS on LRS remittances
It does not really apply to NRIs. It applies to residents sending money
abroad. Under Liberalised Remittance Scheme (LRS),
you can remit up to USD 250,000 per financial year. That limit remains the
same. However, there will now be Tax collection at source (TCS) at 5% if the
remittance amount exceeds Rs 7 lacs. If the PAN/Aadhar is not furnished, TCS
will be at 10%.
Do note this is only TCS. You can claim excess tax deducted at the time
of filing ITR.
ESOPs, Home Loans and Other important Announcements
#8 Relief for ESOP holders
There is good relief for taxpayers who get ESOPs from their employer.
Under the current regime, the employees must pay taxes at 2 stages.
1. When they exercise
the option and get shares (buying of shares requires cash outflow and tax
increases the burden). The difference between the exercise price and the market
value of the shares is treated as perquisite and taxed at your marginal tax
rate. If you see, income is received only in kind (and not cash). Therefore,
tax at this stage increases the cash burden.
2. When the shares are
actually sold. Capital gains tax is to be paid at this stage.
To rectify this problem in (1), the employees will now have an option of
deferring tax payment for up to 4 years. The assess must pay the tax within
14 days of the earliest of the following,
1. 48 months from the
end of the financial year in the option was exercised
2. Date of sale of
such shares
3. Date from which the
assess ceases to be the employee of the person
As I understand, this rule works with select startup companies. Do
consult your Chartered Accountant.
#9 Extension on Home Loan Tax Benefit under Section 80EEA
In Union Budget 2019, the Government had introduced Section 80EEA to
provide additional deduction of Rs 1.5 lacs for interest paid on home loans to
the first time home buyers. This was over and above the relief on interest of
Rs 2 lacs under Section 24 of the Income Tax Act.
The relief under Section 80EEA was subject to the following conditions.
1. The home loan must
be sanctioned between April 1, 2019, and March 31, 2020.
2. The stamp duty
value of the house must not exceed Rs 45 lacs.
3. You must not own
any house on the date of sanction of the loan.
Remember the tax benefit would continue to be available in the following
years as long as the above 3 conditions are met.
In the budget 2020, the relief under Section 80EEA has been extended by
1 year to the home loans sanctioned between April 1, 2019 and March 31,
2021.
Do note you will be able to take the tax benefit under Section 80EEA if
you stick with the old tax slabs. If you opt for the new tax slabs, you won’t
be able to avail this tax benefit.
#10 Other important Announcements
The Government will come with LIC IPO soon. So, if LIC policies are not
enough for you, you will soon be able to purchase shares of LIC.
Deposit insurance from DICGC has been increased from Rs 1 lac to Rs 5
lacs per depositor. This is good news if you are worried about your bank fixed
deposits or savings bank account balance.
Disclaimer: Please consult a Chartered Accountant before
acting on the basis on contents of this post. Additionally, these are
only budget proposals. These rules can be withdrawn or amended or may not even
come into force. These rules will come into force once the Finance Bill is
passed by the Parliament.
