Budget 2020 Proposals: On the tax proposals front, the Finance Minister presented the Union Budget 2020-2021 with an endeavour to introduce further reforms to stimulate growth, simplify tax structure, bring ease of compliance, and reduce litigation. Additionally, the Budget also aimed to enhance the purchasing power by leaving more net disposable income. The key personal tax proposals pronounced are as under:
1. New Optional Tax regime for Individual Income taxation
With an intent to provide relief to the individual tax payers and simplification of tax provisions, a new optional personal tax regime has been proposed wherein multiple income tax rates trigger on various slabs of income. Below is the new proposed structure under the new regime:
|Income tax slabs||Income-tax rate|
|Upto INR 2,50,000||Nil|
|From INR 2,50,001 to INR 5,00,000||5%|
|From INR 5,00,001 to INR 7,50,000||10%|
|From INR 7,50,001 to INR 10,00,000||15%|
|From INR 10,00,001 to INR 12,50,000||20%|
|From INR 12,50,001 to INR 15,00,000||25%|
|Upto INR 15,00,001||30%|
The prevailing tax rebate of Rs 12,500 for individuals with income below Rs 5 lakh p.a. along with applicable surcharge as per income levels and health and education cess (@ 4 per cent) on such tax existent in the current regime would continue to be levied in the new regime also.
Individuals with no business income can exercise their choice either of the tax regime every year at the time of filing the return of income from FY 2020-21.
The choice of the new tax regime, although, comes with a few pre-requisite conditions such as:
# Foregoing prescribed exemptions under Section 10 (such as leave travel concession, house rent allowance etc.), Section 16 (standard deduction, professional tax, etc), Section 24 (home loan interest in respect of self occupied property) deductions etc.
# Denial of specified deductions under chapter VI-A of the Act (such as Section 80C, Section 80D, Section 80G, etc.)
# Restriction on other specified exemptions/ deductions, set-off, etc depending upon certain specific cases.
2. Relief in Employee Stock Option Plan (ESOP) taxation for Startups
In the case of start-ups, Employee Stock Option Plans (ESOPs) or sweat equity are typically a significant component of the employee compensation which play a vital role in attracting highly talented employees.
Currently, ESOPs are taxed to two stage taxation, first as tax on perquisite as income from salary at the time of exercise of options and second as tax on income from capital gains at the time of sale of shares (post allotment pursuant to exercise).
It is believed that salary taxation at the time of exercise typically leads to cash flow problems for the employees who choose not to sell the shares immediately post exercise/ allotment and continue to hold the same for the long-term.
In order to ease the burden of payment of such taxes by the employees of the eligible start-ups or deduction of tax at source by the start-up employer, the Union Budget 2020 proposes to defer the payment of taxation by maximum five years from the end of relevant financial year or until they ceases to be employee of the company or till they sells the shares eventually — whichever is earlier.
Such taxes are required to be paid or deducted, as the case may be, within a period of fourteen days of aforesaid period.
3. Extension for deduction in respect of affordable housing
Additional deduction of up to Rs 1.5 lakh p.a. was introduced last year in respect of interest paid on loan taken for purchase of prescribed affordable house for first-time home buyers. Such deduction was subject to the conditions that the loan shall be sanctioned on or before 31st March 2020. In order to promote ‘Housing for All’ objective and to widen the taxpayer base availing such deduction, it has been proposed to extend the date of loan sanction by one more year, i.e. 31st March 2021.
4. Modification in tax residency provisions
There are significant changes proposed in determining tax residency of individuals. Indian citizens and person of Indian origin who come to India on visits had an extended period of 182 days of stay in India before they could be regarded as a resident of India from an income tax perspective. This period has been proposed to be reduced to 120 days now. This could result in such individuals triggering residency whose stay in India was hitherto more than 120 days however less than 182 days in the relevant FY. In case such individuals then qualify as ordinary resident they may be taxable in India on overseas income as well as will need to disclose their overseas assets in their India tax return.
Also, Indian citizens will always be regarded as residents of India irrespective of their stay in India in the relevant FY if they are not liable to pay tax in any other country/ territory on account of their residence/ domicile etc. This amendment could potentially impact many Indians who may be working/ staying in countries with no tax system. It is also believed that there is ambiguity in interpretation of the term “liable to be tax” which may require some further clarifications from the Government. As an example there could be individuals who may have travelled to various countries in the FY and is a non-resident of all such countries visited.
Under the current tax residency rules, after having determined an individual as a resident, there is a secondary test to determine whether the individual qualifies as a not ordinary resident (NOR) or ordinary resident (OR). This test has been modified significantly. As per the proposed new test, an individual will be a NOR provided he has been a non-resident for 7 (earlier 9) out of past 10 FYs. Resultantly, expatriates who come to work in India will potentially likely to become OR for the first time in the 5th year onwards instead of 3rd year onwards currently.
5. Variation in tax treatment of employer’s contribution
Employee Provident Fund (‘PF’) Scheme, National Pension Scheme (‘NPS’) and approved Superannuation Fund (SAF) are three of the most prevalent employer funded retirement schemes currently. The employer contribution to these schemes is currently not taxable in the hands of the employee up to specified limits (12 per cent of eligible salary for PF, 10 per cent of eligible salary for NPS and Rs 1.5 lakh per annum for SAF). In other words, currently there is no combined upper limit for the purpose of deduction on the amount of contribution made by the employer.
It is now proposed to introduce a combined upper cap of Rs 7.5 lakh p.a. in respect of employer’s contribution in a year to these three funds/ schemes. Consequently, it is also proposed that any annual accretion by way of interest, dividend, etc. earned on the accumulated corpus should be treated as a perquisite to the extent it relates to such employer’s contribution taxable in the hands of individual.
6. Ease of compliances
Under the current provisions of the Act, the filing of appeals before Commissioner of Income-tax (Appeals) has already been enabled in an electronic mode wherein taxpayer can furnish an appeal through his/her registered account on the e-filing portal. With the objective of further improving the effectiveness of tax administration and to eliminate human interface, faceless appeal scheme is proposed to be launched on similar lines of e-assessment scheme (for first level assessment) introduced last year.
To conclude, Budget 2020 focussed on three key themes – Aspirational India, economic development and building a caring society for all. The aforesaid proposals, amongst others, seem to have been introduced keeping such themes in mind and at the same time preserving fiscal prudence.
( A version of this article appeared in The Financial Express on February 2, 2020)