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Highlights of Key Income Tax Amendments by Finance Bill 2020-Union Budget 2020


Finance Minister Nirmala Sitharaman presented the Union Budget 2020 along with the Finance Bill, 2020 on 1st February 2020 in the Parliament to amend the Income Tax Act, 1961. The main highlights of Income Tax provisions in the Union Budget 2020 for taxpayers are listed in this article. This is her first full-term Union Budget since the formation of the new government in May 2019.

The main highlights of key Income Tax amendments by Finance Bill 2020 are listed below:

I. Concessional rates of income tax

(1) Optional new income tax slab and income tax rates: A new simplified optional system of income tax slab and income tax rates has been introduced. The existing system of tax rates is also in force wherein no changes are proposed. However, under the optional new tax regime, income slab and income tax rates are changed.

The proposed tax rates under the optional new regime is given in the table below-

Sl. No.
Total income
Rate of tax
Upto Rs 2,50,000
From Rs 2,50,001 to Rs 5,00,000
5 percent
From Rs 5,00,001 to Rs 7,50,000
10 percent
From Rs 7,50,001 to Rs 10,00,000
15 percent
From Rs 10,00,001 to Rs 12,50,000
20 percent
From Rs 12,50,001 to Rs 15,00,000
25 percent
Above Rs 15,00,000
30 percent

Note that the new personal tax rates are optional and may only be availed if a person does not claim certain exemptions or deductions. These include standard deductions, leave travel allowance, house rent allowance, interest payment on home loans, and deductions under Chapter VI-A. 

The new optional system of taxation will apply only to an individual and a HUF.

The option needs to be exercised at the time of filing of return.

(2) Concessional or lower tax rate for a resident co-operative society: Similar optional concessional rate of 22 percent tax is provided for a resident co-operative society if it forego the prescribed deductions.

(3) Benefits of lower corporate tax rate extended: Currently, domestic manufacturing companies have an option to pay income tax at the rate of 15% if they do not claim certain deductions under the Act. This benefit has been extended to domestic companies engaged in electricity generation.

II. New income under tax net

(4) Dividend Distribution Tax (DDT) abolished: The DDT on the distribution of dividends by a domestic company to its shareholders abolished and the exemption in respect of receipt of dividends by the shareholders is withdrawn. Dividend income will now be taxable in the hands of the recipient.

(5) Meaning of 'Salary' expanded: Contributions by an employer to employees' account in a recognized provident fund, an approved superannuation fund and the National Pension Scheme in excess of Rs 7.5 lakh in a year is made taxable as salary. Further, the interest on such an excess amount of employers' contribution will be taxable as perquisite.

(6) Changes in residential status rule: An Indian citizen or a person of Indian origin will be considered a resident if on his visit to India stays for more than 120 days. This has been reduced from 182 days. 

Further, an Indian citizen or a person of Indian origin who is not liable to tax in any other country by reason of his domicile or residence or any other reason shall be deemed to be a resident of India.

Similarly, changes were made in the rule for determining resident but not ordinarily resident status.

III. TDS and TCS provisions

(7) TDS on e-commerce transactions: TDS of 1% will be levied on e-commerce transactions subject to a threshold limit of Rs. 5 lakh.

(8) TDS on dividend: TDS of 10% will be levied on dividend payment to a resident shareholder subject to a threshold limit of Rs. 5,000.

(9) TDS on income from units of a mutual fund: TDS of 10% will be levied on income from units of a mutual fund subject to a threshold limit of Rs. 5,000.

(10) TDS for fees for technical services reduced: TDS for fees for technical services (FTS) reduced from 10% to 2%.

(11) TCS on foreign remittance: TCS of 5% (10% in non-PAN/non-Aadhaar cases) will be collected by an authorized dealer on foreign remittance under the LRS of RBI subject to a threshold limit of Rs. 7 lakh.

(12) TCS on foreign tour package: TCS of 5% (10% in non-PAN/non-Aadhaar cases) will be collected from a person who purchases the foreign tour package. No threshold limit prescribed.

(13) TCS on sale of goods: TCS of 0.1% (1% in non-PAN/non-Aadhaar cases) will be collected from a buyer subject to  a threshold limit of Rs. 50 Lakh by a seller whose turnover is more than Rs. 10 crore .

IV. Extension of period to claim tax benefits

(14) Tax incentives on affordable housings: An exemption is being provided on profits or gains arising from an affordable housing project if the project is approved by March 31, 2020. Further, an additional tax deduction of up to Rs 1,50,000 is allowed on interest paid on loans to a first time home buyer if the home loan is sanctioned by March 31, 2020. The deadline in both cases has been extended to March 31, 2021

(15) Tax incentives to start-ups: Start-ups are allowed to claim 100% deduction on profits for any three consecutive years out of their first seven years, if they are incorporated between April 1, 2016 and March 31, 2021 and their turnover does not exceed Rs 25 crore. The waiver has been extended to start-ups for any three years out of their first ten years. In addition, the turnover threshold has been increased from Rs 25 crore to Rs 100 crore.

(16) Deferment of Tax on ESOPs: Further, the tax on ESOPs held by employees of start-ups will be payable only on the earliest of the following events:
(i) expiry of 4 years from the end of the assessment year,
(ii) sale of the options, or 

(iii) till the employee leaves the company.

(17) Carry-forward of losses or depreciation in case of merger: The benefit for carry-forward of losses or depreciation  will be allowed to amalgamated public sector banks and public sector General Insurance Companies in case of merger.

V. Faceless e-Schemes

(18) Introduction of e-Schemes: e-Appeals and e-Penalty schemes will be notified for faceless proceedings in line with faceless e-assessment scheme.

VI. Miscellaneous Provisions

(19) Taxpayers' Charter: The government will notify Taxpayers' Charter.

(20) Pre-deposit to get a stay of demand from ITAT: To get a stay on the demand from ITAT, at least 20% of the demand amount has to be paid or security needs to be furnished. 

(21) Renewal of trust registration: A trust is required to renew its registration after every five years to get an exemption.

(22) Commodities Transaction Tax: The Finance Bill, 2020 creates three CTT rates: 

(i) 0.01% payable by the seller on the sale of commodity derivatives based on its price or price index, 

(ii) 0.0001% payable by the buyer on the sale of an option in goods resulting in the delivery of the goods, and 

(iii) 0.125% payable by the buyer on the sale of an option in goods resulting in a cash payment.

(23) Removal of tax exemptions on certain allowances: Certain exemptions on facilities to current and former members of the Union Public Service Commission and the Election Commission such as rent-free residence, conveyance allowance, and medical facilities are exempt from tax. This exemption has been removed.

(24) Penalty for fake invoice: A penalty equal to the amount of false entry or omitted to make any genuine entry to evade tax liability will be applicable. 

Though the list of amendments in the Income Tax Act, 1961 by the Finance Bill, 2020 is very lengthy, however, the highlights of key amendments are listed as a ready reference.

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