Implications of The Tax Regime

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Implications of the tax Regime

Finance Minister Nirmala Sitharaman while presenting the Union Budget 2020 on February 1, 2020 introduced the new Income Tax regime. The new tax regime is effective from April 1 2020. Here are some of the prominent changes applicable for the financial year 2020-2021.

1. Introduction of new tax slabs

New tax slabs came into effect from April 1 2020. Taxpayers will be provided with an option to choose either the old tax slab or the new income tax slab system. However taxpayers opting the new tax slab will not be able to avail several deductions and benefits like HRA, LTA, professional tax and several other exemptions.

Taxable Income SlabExisting Tax Rates
New tax rates
Up to Rs. 2.5 lakhsNo taxNo tax
Above Rs. 2.5 lakhs to Rs. 5 lakhs5%5%
Above Rs. 5 lakhs to Rs. 7.5 lakhs10%20%
Above Rs. 7.5 lakhs to Rs. 10 lakhs15%20%
Above Rs. 10 lakhs to Rs. 12.5 lakhs20%30%
Above Rs. 12.5 lakhs to Rs. 15 lakhs25%30%
Above Rs. 15 lakhs30%30%

2. Dividend income will be taxed  

Dividend income received from investments in mutual funds and Indian companies will be taxable in the hands of the recipient. It will be added to an individual’s taxable income and taxed according to the applicable income slab. In addition to this, if the dividend income in an FY exceeds Rs 5,000, it will attract tax deduction at source at 10%. Last year the dividends earned were tax exempt

3. Employer’s contribution of over Rs. 7.5 lakhs to EPF, NPS will attract tax

If any employer’s contribution is greater than Rs 7.5 lakh in an FY towards the NPSor EPF, the amount will be taxable in the hands of the employee. This change will apply to both old and new income tax regimes.

4.Deferring tax payment of income pertaining to ESOPs

To Provide relief to employees of startups, the government has allowed deferment of tax deducted on the source on shares allotted to them under the employee stock ownership plan. Now TDS on shares allotted under ESOPs scheme can be deducted either at the time of the employee leaving the organisation or selling of the shares or expiry of 5 years from the end of the particular FY in which shares were allotted, whichever is earlier.

5.NRI status

The government introduced changes to determine the NRI status or otherwise of an individual. A non-resident Indian visiting India will be temed ‘Resident but not ordinarily resident’, if the taxable income of the individual earned in India exceeds Rs 15 lakh, stay in India exceeds 120 days and his total stay in India in the preceding four financial years is 365 days or more.

But, if the taxable income earned in India does not exceed 15 lakh, then the individual will be termed an NRI provided his stay is less than 181 days.

Tax exemption on the home loan

 The deadline for availing tax benefits for those who have purchased their first house for Rs 45 lakhs or less, has been extended to March 31, 2021. All those who have taken loans to purchase houses up to Rs 45 lakh will be eligible to claim an additional tax exemption of Rs 1.5 lakh on interest. Further, there would be an already existing deduction of Rs 2 lakh.

The new financial year will start from April 1 2020, Government of India earlier notified a few noticeable changes for FY 20-21. A new tax slab will come into existence and taxpayers will be provided with an opportunity to either select  the new tax regime which attracts lower tax rates without significant tax deduction or continue with the old tax regime.

The government changed the tax status of the dividends earned, now the interest earned in the form of dividends will attract the tax in the hands of the recipient. In addition to this the government extended the timeline for tax exemption for the home loan upto Rs. 45 lakhs. Rules regarding the NRI status were changed and also allowed deferring payment of income pertaining to ESOPs. FM also notified that TCS at the rate of 5% will be charged on remittances exceeding Rs 7 lakh a year, under the Reserve Bank of India’s liberalised remittance scheme. However, about education payments, the tax rate is lower at 0.5%.

The new Budget 2020 has transformed itself. Looking at the current situation, there are a lot of changes seen in the graph for income tax. There is a cutback in overall tax rates. Also, people now will have to forego the old exemptions and deductions they had availed earlier. 

The Ministry of Finance has undertaken an overall estimation of data. Out of the total population, 69% will save tax as per the new tax system. Another 20% might want to switch to another alternative. There are more effective ways for tax-planning, which are hassle-free and involve less paperwork.

The entire Budget 2020 focuses on three main themes. We have an aim to create an aspirational India fostering economic development. A new set of recommendations need to be followed, and at the same time, a proper financial base needs to set.

A new tax slab has been set-up. The people with a high tax bracket have to bear a higher tax burden. On the other hand, less tax burden has to be kept for people with a low tax bracket. On average, a TDS of the rate of 10% has to be made applicable.