Big Story: What the Budget means for taxpayers and investors

For taxpayers: A dampener mostly; some relief too

The proposed new tax regime may not be worth it for many taxpayers. However, there are a few feel-good moves on compliance

For individual taxpayers, the Budget has been underwhelming, especially given the high expectations that preceded it.

In an attempt to address the demands of taxpayers to lower tax rates, the Finance Minister has given them a choice to move to a new tax regime. But this has only complicated matters, and the end-result may not be worth it for many taxpayers.

So, we now have the option of continuing with the existing tax regime (with existing income slabs, tax rates and benefits of deductions and exemptions) or moving to the new tax regime (with new income slabs, lower tax rates, but without the benefit of most deductions and exemptions).

Should you opt for the new tax regime? The short answer is — it depends. Number-crunching and cost-benefit analysis will be needed to decide whether to stay in the old regime, or shift to the new one.

Under the old regime, there were four income slabs and basic tax rates. This will now become seven (see table).

On the face of it, the rejig of income slabs and lower taxes in the new regime should ideally translate to lower taxes. But there is a catch that spoils the match. To be eligible for the new regime that has lower tax rates, you will have to forgo the benefits of most tax breaks.

These include deductions such as Section 80C (annual investment, expenses, life insurance premium of up to ₹1.5 lakh), Section 80D (health insurance premiums), Section 24 (home loan interest of up to ₹2 lakh), Section 80CCD (including extra NPS (National Pension Scheme) contribution of up to ₹50,000 a year), Section 80E (education loan interest), Section 16 (standard deduction on salary income).

Also, you will have to forgo the benefits of most exemptions under Section 10 such as house rent allowance and leave travel concession.

In the new regime, only a handful of deductions and exemptions are allowed. These include employer contribution on account of employee in NPS, transport allowance for specially abled employees and conveyance allowance to meet office duty expenses.

In essence, it is now a choice between higher tax rates with the benefits of most tax breaks (old regime), and lower tax rates with almost no deductions and exemptions (new regime).

The Finance Minister gave the example of a person with an annual income of ₹15 lakh and not claiming any deductions, and said that for such a person, the tax under the new regime would be ₹1.95 lakh, while it will be ₹2.73 lakh in the old regime.

This is true, but the end result could well be different if the person is taking the benefit of several tax breaks, for instance Section 80C (₹1.5 lakh), Section 80D (₹25,000) and Section 24 (₹2 lakh). In this case, the taxable income of the person under the old regime will come down to ₹11.25 lakh (₹15 lakh minus the deductions) and the tax liability will be ₹1.56 lakh.

But under the new regime, the taxable income of the person will remain ₹15 lakh and the tax liability will be ₹1.95 lakh — that is, it will be better for the person to continue under the old regime since the tax will be lower by ₹39,000.

The above scenario could play out in multiple ways. So, you have to take into account the impact of these tax breaks on your final tax liability before deciding.

You have the flexibility of continuing with the old regime for now, and then moving to the new regime in the future.

Also, if you have no business income, you can make the choice between the old and the new regime every year. But if you have business income, once you have made the choice to shift to the new regime, you will have to continue with it in future years, too.

The Finance Ministry said that measures are being taken to pre-fill the income-tax return for individuals who opt for the new regime, so that they would need no assistance from an expert to file their returns and pay income tax.

But given the number-crunching that will likely be involved in making the choice between the old and the new regime, many might have no choice but to seek the services of tax experts.

Other moves

The new regime sans any deductions/exemptions hogged most of the limelight. But there are several small moves in the Budget to ease compliance as well as cast the tax net wider.

Ease of compliance

Worried about harassment by the tax department? Sweat no more. Over the past few years, filing and processing of returns, issue of notices and refunds have all been moved online. E-assessment and e-proceedings for select cases have also been introduced.

The Budget has taken this further by bringing more interactions into the faceless mode.

While e-assessment currently is only applicable if your tax return is taken up for further closer scrutiny (under Section 143), the scheme is now being extended to cases under Section 144. Otherwise called ‘best judgement assessment’ cases, these are cases where the tax officer will determine the tax liability of an assessee based on the material he/she has gathered, if the assesse has not filed returns or responded to notices.

On similar lines, the process of filing appeals and of imposition and payment of penalties will also be moved entirely online, so as to avoid scopes for manipulation at all ends.

If you are one of those fighting a long-drawn case involving an income-tax demand raised by tax authorities, you have a chance to bring this ordeal to a close. The ‘Vivad se Vishwas’ scheme proposes that a taxpayer will get a complete waiver from interest and penalty if she settles the dispute before March 31, 2020.

Those who use the scheme between March 31 and June 30 will have to pay an additional amount. The Budget is, however, silent about any waiver of tax dues. The waivers under Sabka Vishwas scheme (for indirect tax cases prior to GST) were as high as 70 per cent in certain cases. Such waivers in Vivad se Vishwas may make it more attractive.

If you are an employee of certain start-ups, you can be relieved, as the first instance of your ESOP taxation has been deferred. Shares allotted under employee stock ownership plans (ESOPs) are subject to tax at two instances.

One at the time of allotment (or exercising the option) — as a perquisite, under the head income from salaries— and two, at the time of subsequent sale (if any), under the head capital gains.

Now, for employees of eligible start-ups, the taxability of the perquisite is deferred to 48 months from the end of the relevant assessment year in which the shares are allotted. However, if the employee quits the job or sells the shares before the expiry of the said 48 months, the perquisite shall be taxable in the year in which he/she quits or sells the shares.

Whatever be the case, the perquisite will be taxed at the slab rate applicable in the year of allotment only.

Wider net

Though there are some feel-good moves, there are also measures that cast the tax net wider.

For salaried taxpayers, employer contribution towards a recognised provident fund, NPS and other superannuation funds now has an upper limit of ₹7.5 lakh, beyond which it will be taxed as a perquisite in the hands of the employee. Accretions to this, such as interest or divided to the extent of the employer’s contribution included for tax purposes, will also be taxed. Similarly, the assessee is allowed a deduction under NPS for 14 per cent or 10 per cent of the salary contributed by the Central government or another employer, respectively.

However, there is no combined upper limit for the purpose of deduction on the amount of contribution made by the employer.

This has led to high-income earners structuring their salary package in such a way that they maximise employer contribution to reduce tax outgo. This loophole is now plugged.

Besides, Form 26AS, which now captures your TDS (tax deducted at source) details alone, will be replaced by a more comprehensive statement.

This will capture not only TDS details but also purchase/sale of property and share transactions.

When you file your return in future, you will need to match your income and tax payment details with this statement, instead of Form 26AS.

For investors: Only small fixes, no major doles

Higher cover for bank deposits is a positive, but little else to cheer

Expectations were running high prior to the Budget about announcements on innovative investment instruments, further tax-breaks for insurance and a large fiscal stimulus to equity and commodity market.

While investors would be happy with the hike in the cover for deposits, other proposals have left investors feeling rather flat.

Higher cover for deposits

The Budget has brought some respite for fixed-income investors by raising the deposit insurance cover to ₹5 lakh from ₹1 lakh earlier.

The Deposit Insurance and Credit Guarantee Corporation of India covers deposit insurance in all commercial banks (small finance and payment banks, too), local area banks, regional rural banks and co-operative banks.

Each depositor now is insured up to ₹5 lakh for both principal and interest.

Deposits kept in different branches of a bank are aggregated for the purpose of insurance cover.

Hence, remember all your funds parked in savings, current and fixed deposits, etc, in one bank (across branches) will have the ₹5-lakh insurance cover.

If you were earlier constrained by the ₹1-lakh cover to park money in banks offering high interest rates, this proposal is a welcome change.

For instance, small finance banks offer higher interest rates on fixed deposits than most traditional banks.

You can now park more money in these banks.

However, remember that the higher insurance could come at a cost.

Banks that currently pay the premium on the insurance cover may have to pay a higher premium.

This may get passed on to you through other charges.

Taxpayer to pay dividend tax

From April 1, 2020, the dividend distribution tax (DDT) on the dividend declared by companies and mutual funds to shareholders/unit-holders will be abolished.

The dividend amount will now be added to your taxable income and taxed as per your tax bracket.

With the abolition of DDT, the dividend plans in mutual funds will lose sheen, as the other variant — growth plans — score on taxation.

Under equity funds, the dividend plans will be suitable for investors falling in the lowest tax bracket of 5 per cent (assuming the taxpayer continues in the old tax regime).

For non-equity funds (assuming taxpayers are in the old tax regime), dividend plans are suitable for investors in the tax bracket of 5-20 per cent.

For others, systematic withdrawal plans (SWPs) in growth plans can be a good option.

In growth plans under equity funds, a holding period of 12 months or more is regarded long-term, wherein long-term capital gains (LTCG) of over ₹1 lakh is taxable at 10 per cent, without the benefit of indexation.

There is a 15 per cent tax on short-term gains from equity funds, if the units are redeemed before 12 months.

In the case of non-equity funds, a holding period of less than 36 months is defined as short-term, and attracts STCG (short-term capital gains) tax, charged as per the investor’s tax slab.

The Budget also proposed to deduct 10 per cent tax at source if MFs distribute dividends over ₹5,000.

Capital gains tax on side-pocketing

The Budget has also clarified on the holding period and cost of acquisition of units allotted after the segregation a mutual fund portfolio due to rating downgrade and credit default.

Accordingly, the holding period of the segregated scheme will be reckoned from the date of investment in the main scheme by the investor and not the date of segregation. Also, the cost of acquisition of the main scheme and the segregated scheme will be the proportionate cost as determined on the date of segregation.

The plan to launch new debt exchange-traded funds (ETFs) consisting primarily of government securities may not enthuse investors, as the performance of existing gilt ETFs — Reliance ETF Long Term Gilt, SBI ETF 10 Year Gilt and LIC MF G-Sec Long Term ETF — has not been very good.

Meagre relief to realty investors

The Budget did not give much to investors in the real-estate space.

But it continued its focus on the affordable housing segment, favouring home buyers.

First-time home buyers looking to get home loans on affordable houses (valued up to ₹45 lakh) are eligible for a deduction (under Section 80EEA) of ₹1.5 lakh on interest on loans sanctioned from April 1, 2019, to March 31, 2020. The Budget has now extended it for another year, up to March 31, 2021.

This deduction is available over and above the existing deduction of ₹2 lakh on home loan interest, under Section 24 of the Income Tax Act.

The move encourages home buyers to purchase affordable houses.

While taxing income from capital gains, business profits and other sources in respect of real-estate transactions, if the consideration (sales value) is less than the circle rate by more than 5 per cent, the difference is counted as income. This income is taxable both in the hands of the seller and the buyer.

But the slowdown in the realty sector has resulted in price correction in certain regions, and to provide relief to both buyers and sellers in the secondary market, the 5 per cent limit has been increased to 10 per cent in this Budget.

Circle rate is the minimum rate of a property that authorities (State government) set for a particular area; the property is usually registered at this rate in case of sale or transfer. Such rates are revised from time to time to align them with the market prices.

No CTT relief

While commodity exchanges and investors had demanded removal of commodities transaction tax (CTT), the Budget extended it to the yet-to-be-launched commodity products, too. Derivatives on commodity indices and options in goods (where the underlying is the commodity directly) will also see levy of CTT.

At present, both these products are not traded on any of the commodity exchanges; both the NCDEX and the MCX recently launched their commodity indices, but there are no contracts on these indices yet.

On commodity index futures, CTT will be charged at 0.01 per cent and will be payable by the seller — this is the same rate at which the CTT is currently charged on sale of commodity futures.

On options in goods, it is chargeable at 0.0001 per cent payable by purchaser where the option is exercised, resulting in actual delivery of goods. Where the option is exercised and it results in a settlement (and not in actual delivery of goods), the CTT will be charged at 0.125 per cent and payable by the purchaser.