There have been significant changes in the income tax rates for the salaried in this year’s Union Budget 2020. You must have read about it.
However, do you know that most of the people who have exemptions to claim might have to pay more tax under the new tax regime? This is because under the new tax rules you can’t claim 70 exemptions including the most popular Section 80C deductions. So, no claims for your life insurance, provident fund savings, House Rent Allowance (HRA) or other such deductions. However, the new tax rates are optional. The Finance Minister said “It shall be optional for the taxpayers. An individual who is currently availing more deductions and exemptions under the Income Tax Act may choose to avail them and continue to pay tax in the old regime”. Only those who forgot exemptions and deductions will get the new tax rates. Before we look at who will benefit from the tax rates and who won’t. Here are the old and new tax brackets.
Note that higher-income earners who are claiming exemptions will pay more tax if they choose the new tax regime as stipulated in budget 2020. Let’s take an example. A salaried individual who is earning Rs. 14 lakhs a year without claiming exemptions will pay Rs. 2.4 lakhs under the old tax regime whereas under the new regime, they need to pay only Rs. 1.69 lakhs. However, if this person was claiming exemptions under Sec. 80C had interest payments on home loan and claims House Rent Allowance, the taxes difference will be higher. While the person will pay Rs. 1.69 lakhs if they opt for new rates, they need to pay only Rs. 65,000 lakhs if the person sticks to the old tax rates. That’s savings of more than Rs. 1 lakh 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. Some mandatory contributions cannot be claimed under the new tax regime as specified in budget 2020. For example, your provident fund contribution is a mandatory deduction made from your salary every month that you can claim under Sec.80C. If you claim deduction under section 24 on home loan interest paid, you will incur this expense over the loan tenure and you can’t claim it. So, individuals need to make calculations regarding their taxes before they choose the new over the old regime.
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Home loan tax exemption
The date of availing home loan for affordable housing scheme has been extended till March 31, 2021. In Budget 2019, the maximum amount of interest paid on a home loan that was eligible for tax benefit was increased to Rs. 3.5 lakhs from Rs. 2 lakhs earlier. An additional tax benefit was given to first-time homebuyers for buying house property whose value is up to Rs. 45 lakhs.
Dividend income
As per the budget 2020, the government will make dividend income taxable in the hands of the recipient. The tax on dividend income will be as per the tax bracket of the individual. All kinds of dividend income including dividend income received from equity shares and mutual funds will now be taxable.So, the Dividend Distribution Tax (DDT) that was levied on this income has been abolished. Mutual fund houses have been asked to deduct 10% tax at source before distributing the dividend if the dividend amount is more than Rs. 5,000.
Presently, DDT is paid by the companies and fund houses before it is given to the investors. Therefore, the dividend received was tax-free in the investor’s hands. However, people earning dividend income of more than Rs. 10 lakhs were required to pay tax at the rate of 10%.
Now, the tax on dividend income will entail a higher tax burden for investors who earn dividend income of less than Rs. 10 lakhs and who are in the higher tax brackets. Only debt fund investors in the lower tax brackets will gain from the new tax on dividend income. Presently, the DDT is 11.64% for equity funds and 29.12% on debt funds. Under the new dividend tax rates, debt mutual fund investors falling in the first two tax brackets of 10% and 20% will pay lower taxes as it is less than the present rate of 29.12%.
Fixed deposits
The government has finally decided to increase the deposit insurance cover to Rs. 5 lakhs per depositor from the present Rs. 1 lakh. After the recent frauds in banks, co-operative banks and non-banking finance companies (NBFCs), this will be a relief to depositors.
Also read: All you need to know before you invest in Fixed Deposits
Foreign payments
Do you send money abroad or love visiting international destinations? Then, you might have to pay more tax. The government will impose a 5% tax collected at source on these. The government has asked foreign exchange dealers to collect 5% of the remittance amount. This is for remittances of over Rs. 7 lakhs made under the Liberalised Remittance Scheme (LRS) of the Reserve Bank of India (RBI).
For foreign tours, the government has asked foreign tour program package providers to collect 5% of the package amount as income tax.
Provident funds
The employer contribution towards any recognized provident fund such as the National Pension Scheme (NPS) will now have an upper limit of Rs. 7.5 lakhs. Beyond this limit, the contribution will be taxed as a perk in the hands of the employee. Any additions to this contribution such as interest or dividend will also be taxed.
Also read: 11 Rules to know – Am I an NRI under FEMA and the Income Tax Act?
NRI taxes
Now, any Indian citizen who is not liable to pay tax in any other country shall be deemed to be a resident Indian and hence liable to pay tax in India. They might have to pay taxes on their global income, even if they don’t earn income in India or get no tax benefits here.
Note that citizens residing in countries such as the United Arab Emirates don’t pay tax in those countries and are liable to pay tax in India. However, NRIs living in countries such as the US, and Singapore will not be included because India has tax treaties with these countries . All changes announced in the Union Budget 2020 this year will be effective from April 1, 2021
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Tax Planning and Management