The 2020 budget speech was the longest in history, but it is probably a measure of the challenge before the finance minister that the budget document itself is even more detailed.
By now, you are likely to have participated in WhatsApp debates around the 2 income tax choices before you, heard about revised taxation of dividends, heard rumours about TDS on capital gains, and, as an NRI, worried about having to pay more taxes.
We summarise the things that matter and recommend waiting a while to take any decisions.
The 2 income tax options
An individual can now choose a lower tax-rate option by giving up deductions, or, continue with the older tax-rate option which provided for deductions - standard deduction, tax-saving investments, provident fund contribution, Insurance premiums, home loan etc. The decision is a complex one because many people already have long term commitments for Insurance, home loans etc. Additionally, by foregoing deductions, you may also end up in a higher taxable income slab for surcharge etc.
Taxation of dividends
Dividends are now taxable as income in the hands of investors. Accordingly, TDS will be deducted @10% for residents (dividend more than Rs 5000) and 20% for NRIs.
TDS on capital gains of mutual funds
There is no change in TDS on capital gains of mutual funds. For resident Indians, it will continue to remain at no TDS. For NRIs, it remains at 10% of gains.
Rs 7.5 Lakh cap on tax-free social security contributions
At present, your employer's contribution to provident fund, superannuation fund, or NPS is completely exempt as income. There is now an annual limit of Rs 7.5 lakhs on this. In addition, any earnings (dividend, interest etc) on the contribution in excess of the limit, are also taxable as perquisites. Not clear whether this second part applies to historical contributions as well.
Taxation of NRI income if no tax is paid elsewhere
You will be taxed as a resident in India for any income that you earn in India, if you are not paying tax on it in any other jurisdiction for reason of domicile or residency status.
Exemption from tax filing for NRIs for expanded income categories
Earlier an NRI didn't need to file a return if their income was only from interest and dividends on which TDS was deducted. This now includes royalties and fees from technical services.
Frequently visiting NRI/ OCI being treated as tax resident
An Indian citizen or a person of Indian origin, being outside India, comes on a visit to India for 120 days or more during the fiscal year; and has been in India for an overall period of 365 days or more within 4 years preceding that year. There is also a change in the definition of "Not Ordinarily Resident (NOR)".
Tax treatment for gains on segregated portfolios
While the mutual fund companies have issued units in segregated portfolios at zero cost, the budget has specified that the cost of acquisition should be in proportion, and, the holding duration should also be in line with the holding duration of the original portfolio. This could get quite complex for SIP investors.
Extension of interest deduction for affordable housing
Sec 80EEA deduction for interest on loan for first homes of less than Rs 45 lakhs is now available for loans sanctioned up to 31 March 2021 (earlier 31 March 2020).
Taxability of ESOPs
Income tax on perquisite value arising from exercise of ESOPs can now be deferred until, 5 years, sale of the shares, or quitting the company - whichever is earlier. The tax rates applicable will be as in the year of exercise.
This is a shortlist of what we believe matters most to our customers. Please note that simplification of language may hide some nuances and complexity that accompanies budget and tax proposals. Also, clarifications are still emerging and this is our best interpretation as of now.
What should I do?
Since all of these changes are applicable only from 1 April 2020, there is no hurry for you to take any decision. Our advice is to wait for clarifications to emerge and possible changes to get finalised as the budget proposals go through the debate and approval process.
What will Scripbox do for its investors?
We will continue to deliver on our promise of simplification using data and algorithms and help you make some of these decisions. We will update existing Scripbox features such as capital gains statement and tax optimised withdrawal logic in accordance with the changes.
Also, expect more tools and features to help you navigate the more complex world.