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Budget 2020: Key Direct Tax points

Updated: Feb 5, 2020

On February 1st, 2020, Honourable Finance Minister Mrs. Nirmala Sitharaman presented Union Budget 2020. Following are the key points pertaining to Direct Tax:

1. Personal Income Tax and simplification of taxation:

# Rebate under Section 87A: The rebate is available to a resident individual if his total income does not exceed Rs. 5,00,000. The amount of rebate shall be 100% of income-tax or Rs. 12,500, whichever is less.

* Reduced Income tax rate, provided no deductions (such as investment in provident fund, public provident fund, life insurance premium, interest on education loan, house rent allowance and other chapter VIA deductions) and exemptions are claimed by the assessees.

Case study:

1. Income ₹ 7,50,000;

  • HRA deduction ₹ 7,000 per month;

  • Section 80C deductions ₹ 1,50,000; and

  • Standard deduction ₹ 50,000 (only applicable for salaried persons).

If you are Salaried / Non-salaried person and earning up to ₹7,50,000 income and claiming deductions and exemptions, it is recommended to choose Old Tax Regime.

2. Income ₹ 10,00,000;

  • Section 80C deductions ₹ 1,50,000;

  • Interest paid on Housing Loan ₹ 50,000; and

  • Standard deduction ₹ 50,000 (only applicable for salaried persons).

If you are a non-salaried person earning income up to ₹ 10,00,000 and having Interest paid on housing loan on self occupied property, it is recommended to opt for New Tax Regime.

However, these recommendations are based on assumed inputs taken above. Actual income tax may vary with additional deductions, exemptions and any other set off from other income heads.

2. Dividend distribution tax (DDT):

  • Currently, companies are required to pay Dividend Distribution Tax (DDT) on the dividend paid to its shareholders at the rate of 15% plus applicable surcharge and cess in addition to the tax payable by the company on its profits.

  • Proposal to remove the DDT and adopt the classical system of dividend taxation under which the companies would not be required to pay DDT. The dividend shall be taxed only in the hands of the recipients at their applicable rate.

3. Concessional tax rate for Electricity generation companies:

  • In order to give boost to the manufacturing sector, new provisions were introduced in September 2019 offering a concessional corporate tax rate of 15% to the newly incorporated domestic companies in the manufacturing sector which start manufacturing by 31st March, 2023.

  • In order to attract investment in power sector, Proposal to extend the concessional corporate tax rate of 15% to new domestic companies engaged in the generation of electricity.

4. Tax concession for foreign investments:

  • In order to incentivise the investment by the Sovereign Wealth Fund of foreign governments in the priority sectors, proposal to grant 100% tax exemption to their interest, dividend and capital gains income in respect of investment made in infrastructure and other 36 notified sectors before 31st March, 2024 and with a minimum lock-in period of 3 years.

  • In order to make available foreign funds at a lower cost, Proposal to extend the period of concessional withholding rate of 5% under section 194LC for interest payment to non-residents in respect of moneys borrowed and bonds issued up to 30th June, 2023.

  • Proposal to extend the period up to 30th June, 2023 for lower rate of withholding of 5% under section 194LD for interest payment to Foreign Portfolio Investors (FPIs) and Qualified Foreign Investors (QFIs) in respect of bonds issued by Indian companies and government securities.

  • Proposal to extend the concessional rate of withholding of 5% under section 194LD to the interest payment made on the Municipal Bonds.

  • In order to incentivise listing of bonds at IFSC exchange, proposal to further reduce the withholding rate from 5% to 4% on interest payment on the bonds listed on its exchange.

5. Start ups:

1. ESOPs are taxable as perquisites at the time of exercise by the employee. For reducing Tax burden in this behalf tax payment has been:

  • Deferred by 5 years; or

  • till the employees leave the Company; or

  • when their shares are sold, whichever is earlier.

2. 100% of its profits of an eligible start-up are allowed for deduction under Income tax Act:

6. Concessional tax rate for Co-operatives:

  • Proposal to provide an option to cooperative societies to be taxed at 22% plus 10% surcharge and 4% cess with no exemption/deductions in place of tax rate of 30% with surcharge and cess.

  • Proposal to exempt these co-operative societies from Alternative Minimum Tax (AMT) just like companies under the new tax regime are exempted from the Minimum Alternate Tax (MAT).

7. Medium, Small and Micro Enterprises (MSME):

  • Turnover threshold for to get books of accounts audited by an accountant has been increased from ₹1 crore to ₹ 5 crore.

  • However, this increase shall apply to those businesses which carry out less than 5% of their business transactions in cash.

8. Others:

  • Additional deduction of up to one lakh fifty thousand rupees for interest paid on loans taken for purchase of an affordable house has been extended till 31st March 2021.

  • Proposal to make the process of registration completely electronic under which a unique registration number (URN) to all new and existing charity institutions.

  • To facilitate the registration of the new charity institution which is yet to start their charitable activities, proposal to allow provisional registration for three years.

  • Under the proposed ‘Vivad Se Vishwas’ scheme, a taxpayer would be required to pay only the amount of the disputed taxes and will get complete waiver of interest and penalty provided he pays by 31st March, 2020. Those who avail this scheme after 31st March, 2020 will have to pay some additional amount. The scheme will remain open till 30th June, 2020.

  • Allotment of PAN instantly on the basis of Aadhaar without any requirement for filling up of detailed application form.

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