A few years back, people were worried that the Direct Tax Code (DTC) might increase personal tax rates. The tax rates recommended by the DTC panel is finally here. Even though the Finance Minister Nirmala Sitharaman has said that the new personal tax rates will be optional, the government is looking at making it mandatory in the next Budget or in the near future. Apart from the tax rates, there are other changes that you should take note of. We give you a snapshot.
2) New personal income tax rates
The personal tax brackets under the new tax regime are:
| Income tax slabs | Simplified, optional tax rate |
| Up to Rs 5 lakh | No tax |
| Rs. 5-7.5 lakhs | 10% |
| Rs. 7.5 – 10 lakhs | 15% |
| Rs. 10-12.5 lakhs | 20% |
| Rs. 12.5-15 | 25% |
| More than Rs. 15 lakhs | 30% |
Note that this will be optional. That means you can stick to the old tax rates if you don’t want the new tax rates. Point number two is that under the new regime you cannot claim most of the tax deductions and exemptions you used to claim under various sections of the Income Tax Act. The Finance Minister has removed 70 tax exemptions and deductions for those who opt for the new lower personal tax rate regime. Most of the commonly available deductions such as section 80C, 80D, 80E, House Rent Allowance (HRA), standard deduction etc won’t be available. So, you either stick to the old regime and go for the new tax rates by forgoing exemptions.
Note that presently, income up to Rs 2.5 lakh for those below 60 years is exempt from tax and for senior citizens aged 60 years and above, income up to Rs 3 lakhs are exempt from tax. Income up to Rs 5 lakhs are exempt from tax for those aged 80 years and above. However, there is a tax rebate of up to Rs 12,500 under section 87A if your net taxable income does not cross Rs 5 lakh. Thereby, you pay zero taxes if your taxable income does not exceed Rs 5 lakhs.
Are the new tax rates really low?
The taxes under the new regime might work out to be lower for those who don’t claim any exemptions. How? Let’s take an example. For someone who is earning Rs 14 lakh without claiming exemptions, the taxes under the old regime will work out to Rs 2.4 lakhs whereas under the new regime, it will be only Rs 1.69 lakhs. However, if this individual was claiming exemptions under Sec. 80C and had interest on home loan, his taxes under the new regime will remain at Rs. 1.69 lakhs while under the old regime he will pay only Rs. 1.32 lakhs. That’s savings of more than Rs. 30,000 when the old rates are used.
So, each individual will have to do his/her own calculations to find out which tax regime is more beneficial. Talk to a Wealthzi wealth consultant if you require any help in your tax calculations.
2) Tax on dividend income, TDS on MF dividends
The Finance Minister has proposed to make dividend income from shares taxable in the hands of the recipient. Income will be taxed as per the tax bracket of the individual. So, the Dividend Distribution Tax (DDT) that was levied on dividend income before distribution has been abolished. Another point is that mutual fund house will deduct 10% tax at source before distributing the dividend if the amount is more than Rs 5,000.
Which are the dividends that will be taxable? All kinds of dividend income including dividend income received from equity shares and mutual funds will now be taxable in the hands of taxpayers.
Presently, DDT is paid by the companies (at 15% plus surcharge) before it is given to the shareholders. Therefore, the dividend received by the shareholders was tax-free in their hands. Also, taxpayers earning dividend income of more than Rs 10 lakhs were required to pay tax at the rate of 10%. For dividend income from mutual funds, the fund house deducted the tax before the investors received them.
The tax on dividend income from shares will entail higher tax burden for retail investors who earn dividend income of less than Rs 10 lakhs and for investors in the higher tax brackets who have been paying tax on dividend income at 10%.
What about mutual funds? Apart from debt fund investors in the lower tax brackets, others will pay higher taxes for dividend income from mutual funds. Now, there is a DDT of 11.648% on equity funds and 29.12% (25% + 12% surcharge + 4% cess) on debt funds.
Under new dividend income tax rates, debt mutual fund investors falling in the first two tax brackets of 10% and 20% will have lower tax burden. They will pay less than the present rate of 29.12%. But those in the 30% tax bracket will now pay 30% plus surcharges on dividend income.
The new changes will take effect from 1st April, 2020.
3) Tax Collected at Source on Foreign remittance/travel
Sending money abroad or visiting international destinations will be costlier as per the Union Budget proposals. The government will impose a 5% tax collected at source on foreign remittances and overseas tour packages. How?
The government will authorise foreign exchange dealers to collect 5% of the remittance amount for remittances made under the Liberalised Remittance Scheme (LRS) of the Reserve Bank of India (RBI). This will be for all remittances of over Rs 7 lakhs.
For foreign tours, the government will authorise sellers of overseas tour programme packages to collect 5% of the package amount as income tax. However, the additional tax can be offset at the time of filing of tax returns.
Once these proposals are passed by the Parliament, the changes will become effective from the financial year 2020-21.
4) Deposit insurance hiked to Rs 5 lakh
The government has decided to increase the deposit insurance cover to Rs 5 lakhs per depositor. Presently, the insurance cover is for Rs 1 lakh. The move comes as a relief to many depositors in the country, after recent frauds in banks, co-operative banks and deposit-taking non-banking finance companies (NBFCs) that raised concerns on the safety of depositors’ money.
5) Tax-free provident funds contribution limit
The employer contribution towards recognised provident fund, National Pension Scheme (NPS) and other superannuation funds will now have an upper limit of Rs 7.5 lakhs. After this limit, such contribution will be taxed as perquisite in the hands of the employee. Any additions to this such as interest or dividend will also be taxed. The new limit will come into effect from April 1, 2021.
6) NRI taxation clarified
The government has said that a non resident Indian citizen who is not a tax resident in any other country shall be deemed to be resident in India and hence liable to tax to pay tax. This will mean that they will have to pay a tax ranging from 5% to 42.7% on their global income, even if they don’t earn income in India or get no tax benefits here.
However, citizens residing in countries such as the UAE will not be liable to pay tax in India as they are bonafide workers. This will also not affect NRIs living in the countries such as US, Canada, and Singapore as India has tax treaties with these countries.
These changes regarding NRIs take effect from 1st April, 2021 and will, accordingly, apply from assessment year 2021-22 onwards.
6) Real estate transactions and circle rate
The government will increase the real estate circle rate tax relaxation to 10% from 5%. Presently, for capital gains, business profits and other income sources in real estate, if the consideration value is less than the circle rate by over 5%, the difference is considered as income. This for both the purchaser and seller. To provide relief, the limit has been increased to 10%. This means that anyone purchasing real estate at a price which is 90% or higher of its stamp duty value will not be subject to additional tax.
Once these proposals are passed by the Parliament, the changes will become effective from the financial year 2020-21.
