This comment on Twitter sums up the mood after Budget 2020 “Investors feel like the AGM attendees who went eagerly expecting gift coupons and found themselves getting just a cup of tea”.
Budget 2020 disappointed investors and markets. Is it all as bad as it is made out to be? We’ll discuss that in a more detailed article next week. For now, let’s look at the impact on your personal finance and taxes.
A new tax regime, but with little use
In a move to simplify and take a step towards the Direct Tax Code, the budget has proposed a new set of tax slabs without the deductions or exemptions that are usually provided to you. Every year, you can choose to opt for the new slab or stick to the old one.
While the slab looks quite friendly at first glance as it takes a graded approach to hiking tax rates, it means that you will lose major deductions.
Proposed tax slab
| Total Income (Rs) | Tax rate |
|---|---|
| Upto Rs 2.5 lakh | nil |
| 2.5-5 lakh | 5% |
| 5-7.5 lakh | 10% |
| 7.5-10 lakh | 15% |
| 10-12.5 lakh | 20% |
| 12.5-15 lakh | 25% |
| > 15 lakh | 30% |
Surcharge and cess apply
Those who opt for the new regime will lose the following major deductions – HRA, interest on home loan, carry forward of loss from house property, Section 80C (that means insurance premium, principal on home loan, tax-saving investments, tuition fee for children, EPF, PPF, and even NPS), standard deduction, and leave travel allowance. There are others, but we have listed the main ones. Essentially, in the new tax system, you simply pay tax on your total income at the slab rates.
A basic calculation indicates that it is unlikely that you find the new tax slab beneficial if you have major deductions such as home loan and HRA, or utilise the full limit of Section 80C. If you have absolutely no such major deductions (home loan & HRA) and weren’t a fan of Section 80C, the new tax structure may involve lower tax outgo if you are at high income levels.
Bottomline – given the complications in salary structures and deductions, you need to ask your auditor to work out which tax structure benefits you each year. This unfortunately adds a layer of complexity to your taxes.
Now declare your dividends and pay tax
Budget 2020 has proposed removal of dividend distribution tax by companies and mutual funds. Instead it proposes to tax dividends in your hands (as other income), at the slab rate at which you fall. TDS will be deducted by the company or the fund house if your dividend per annum from the AMC or company exceeds Rs 5,000.
This means two things: one, dividend as an option becomes further unattractive for mutual fund investors, unless you are in the lowest (5%) tax bracket. This is fine as dividend was never a good option either in debt or equity funds. Second, for those who hold dozens of shares, you will have to compile the quantum of dividend you receive each year in order to calculate your tax outgo – and this can well be a painful job.
Your bank deposit will get safer
A positive move for you comes in the form of the Budget’s proposal to allow the Deposit Insurance and Credit Guarantee Corporation (DICGC) to increase deposit insurance to Rs 5 lakh from Rs 1 lakh now. This is per depositor. Note that a deposit insurance doesn’t automatically mean that you will get your money when there is an issue or if the bank is faced with liquidity crunch. A bank must go bust for you to get it.
Relief on ESOP
There’s some taxation relief for employees of start-ups who receive stock options (ESOPs) from their employer. Note that the start-up needs to qualify under Section 80-IAC of the Income Tax Act for this. Up until now, at the time of exercising the ESOP option, its value was deemed to be a perquisite and included as part of your income. You had to pay tax on this whether or not you had realised the monetary value of the ESOPs.
This has changed now for ESOPs granted in the 2020-21 fiscal and onwards. You will have to pay tax on the earliest of the following dates:
- At the end of 5 fiscal years from the year in which you exercised the ESOP
- The date on which you sold the shares
- The date on which you ceased being an employee of the company
Important note here – you will have to pay the tax within 14 days of this date.
Govt. goes behind NRIs
The budget has proposed that to be classified as an NRI, a person must stay abroad for at least 245 days as opposed to at least 182 day currently. In other words, you need to be in India for less than 120 days (as opposed to less than 182 days earlier) to be classified as NRI. Besides, the budget states that NRIs who do not pay tax in their residing countries will be taxed in India. However, note that the Finance Minsitry has clarified that if the NRI has not income in India, his/her foreign income will not be taxed. You can live in tax-free countries and enjoy the benefits there. Such income won’t be taxed in India. Both these moves can impact NRIs who managed to stay tax-light by being ‘stateless’ or by juggling their stay in India to fit the ‘NRI’ label.
Less benefits from Corporate NPS
For those of you in the high tax bracket using corporate NPS for tax planning, there is some bad news. Currently, contribution by a company on behalf of employee was exempt without a limit. Now an upper limit of Rs 7.5 lakh comes into force for NPS, superannuation and provident fund put together.
In a nutshell, Budget 2020 hasn’t been too friendly for taxpayers. Does it hold better implications for the economy and the markets? Look out for our take next week.
