The budget brings a bag of amendments along and there begins a never-ending discussion of whether these are good news or not. So like every other year, this year, the Budget introduced some of the peculiar changes in existing Income Tax Laws which will certainly impact your pocket from the start of the coming financial year.
So we decided to sum up everything that could knock your pockets from April 1st, 2021. Hope this article will help everyone looking for amendments affecting or impacting their pockets from April 1st.
Introduction of new wage code
This Budget came with the New-Wage Code which dictates that the basic component in the Salary structure should be at least 50%. Currently, companies have a practice of capping the basic pay around 25-40%, however, with the introduction of the New-Wage Code, Basic Component will be a minimum of 50%.
Implementation of the same may yield interesting results. Capping the basic pay at 50% would mean that other allowances like HRA etc. are capped at 50% altogether. Pay packages will definitely witness a rejig in the salary structure since there are also other rules like PF rules and gratuity which will change with this Budget.
Related Article: Checklist for your Investment portfolio in 2021
1. Provident Fund Rules and Regulations
The Budget has announced certain changes in EPF rules too. Currently, the Employees Provident Fund comes with the tax status of EEE. Contribution to Employee’s Provident Fund as well as the proceeds from the EPF are tax-free.
However, with this budget, contribution above Rs. 2.5 lakhs towards EPF would be covered under Income Tax.
If the employer provides the option of opting for NPS (National Pension Scheme) as an alternative for tax saving over and above the contribution of Rs.2.5 lakhs, then only the employee would be able to save tax.
This rule is also applicable to the Voluntary Provident Fund (VPF). Hence, if the contribution at any time, considering both EPF and VPF exceeds rs. 2.5 lakhs then the excess would be charged to Income tax from now onwards.
2. Pinch to Income Tax Returns Non-filers
Respected Finance Minister Ms. Nirmala Sitharaman made it plenty clear that the Income Tax is widening its scope and coverage. One more hint is the insertion of section 206AB, which basically deals with the highest rate of TDS for non-filers of Income Tax Returns. Additionally, the highest rate of TCS is dictated by section 206CCA.
This move is expected to bring the non-filers also into the Income Tax net. Mass filing of ITR would definitely result in improvement in the transparent process of ITR.
3. Prefilled Income Tax Returns are a reality now
ITR filing for capital gain is very complex and time-consuming especially for shares and mutual fund trading. However, this year brings a welcome change to this set process. Finance Minister has announced the entry of prefilled Income Tax Return w.r.t following
- Income under the head “Capital Gain” from the sale of listed securities.
- Income from dividend
- Interest Income from Bank fixed deposits
- Interest Income from Post Office
This will achieve ease of filing as well as will ensure that no income escapes the taxability.
4. Leave Travel Concession in COVID-19 backdrop
The year 2020 has been harsh to everyone and hence the Respected Finance Minister has announced a change in LTC (Leave Travel Concession) in this year’s Budget.
This year would be in the form of a cash allowance rather than a regular LTC scheme due to the COVID-19 impact.
This scheme will be exercised in the block of 4 years of 2018-2021. LTC was available only on travel expenditure earlier. But in 2021, the employees are allowed to take an exemption of the amount spent on buying the specified goods and services as notified. It is required that the money should have been spent on goods and services through electronic mode and from 12th October 2020 to 31st March 2021. However, this scheme specifies the upper cap on the expenditure as well.
5. Gratuity is Good News after all
Gratuity was previously applicable only if you were onboarded on the payroll of the company. It required that the employees should complete a minimum period of employment before becoming eligible for gratuity payment.
However, with new Gratuity rules, even if the employee works on contract even for a year, then he would be eligible for the gratuity. This change is considered a welcome move.
6. Changes in ULIP contribution
This Budget has brought in the new and much-awaited news from the perspective of the private players in the mutual fund markets. ULIPs were totally exempt and considered under EEE tax status.
However, with these budget amendments, the tax would be levied on capital gains at par with mutual funds, which is at 10% on the amount exceeding Rs.1 lakhs. However, ULIPs are taxable only if the annual premium amount increases by 2.5 lakhs. Due to this amendment, ULIPs no longer would be lucrative as compared to Mutual Funds in tax scenarios.
Important pointers to deal with the changes
- Check if the salary pay package is changing as per the wage code and make necessary changes for maintaining the liquidity position all along.
- Reconsider the Employees Provident Fund and Voluntary Provident Fund contributions so as to mitigate the tax liability brought in by the budget.
- Check with the employer whether LTC claims are entertained and what are the eligible goods and services for which they can be availed.
- If you are a contract employee, ensure that you will at least complete a year to be eligible for gratuity.
- Consider reorganizing the tax investments for availing deductions in line with amendments, especially w.r.t ULIPs, EPF contribution, etc.
- Always ensure to file ITR on or before the due date to avoid the highest rate of Interest.
Some of the facts which you don’t know about Budget 21. Here is the list
1. ULIP maturity is TAXABLE. Budget 2021 has proposed not to provide tax exemption under section 10(10D) of Income Tax Act for maturity proceeds of the unit-linked insurance policies (Ulips) with annual premium above ₹2.5 lakh. The rules will apply for Ulips issued on or after 1 February 2021. According to Budget memorandum, “Under the existing provisions of the Income Tax Act, there is no cap on the amount of annual premium being paid by any person during the term of the policy. Instances have come to the notice where high net worth individuals are claiming exemption under this clause by investing in Ulips with a huge premium. Allowing such exemption in policy/policies with huge premium defeats the legislative intent of this clause.”
Related Article: ULIPs with an annual premium above ₹2.5 lakh to be taxed.
2. TDS deduction by buyer if paying more than 50 Lacs in a year for purchase of Goods. Section 194Q of Income Tax. (1) Any person, being a buyer who is responsible for paying any sum to any resident (hereafter in this section referred to as the seller) for purchase of any goods of the value or aggregate of such value exceeding fifty lakh rupees in any previous year, shall, at the time of credit of such sum to the account of the seller or at the time of payment thereof by any mode, whichever is earlier, deduct an amount equal to 0.1 per cent. of such sum exceeding fifty lakh rupees as income-tax. Explanation.––For the purposes of this sub-section,
“buyer” means a person whose total sales, gross receipts or turnover from the business carried on by him exceed ten crore rupees during the financial year immediately preceding the financial year in which the purchase of goods is carried out, not being a person, as the Central Government may, by notification in the Official Gazette, specify for this purpose, subject to such conditions as may be specified therein.
3. Limit of tax exemption of Interest on Provident Fund: In order to rationalise tax exemption for the income earned by high income employees, it is proposed to restrict tax exemption for the interest income earn on the employee’s contribution to various provident funds to the annual contribution of Rs 2.5 lakhs. This restriction shall be applicable only for the contribution made on or after 01/04/2021.
4. Relaxation to NRI for Income of Retirement Benefit Account: In order to remove the genuine hardship faced by the NRIs in respect of their income accrued on foreign retirement benefit account due to mismatch in taxation, it is proposed to notify rules for aligning the taxation of income arising on foreign retirement benefit account.
5. Timely deposit of Employees’ contribution to labour welfare funds by Due Date: Delay in deposit of the contribution of employees towards various welfare funds by employers result in permanent loss of interest/income for the employees. In order to ensure timely deposit of employees’ contribution to these funds by the employers, it is proposed to reiterate that that the late deposit of employees’ contribution by the employer shall never be allowed as deduction to the employer.
6. Exemption for Leave Travel Concession (LTC) cash scheme: In order to provide relief to employees, it is proposed to provide tax exemption to the amount given to an employee in lieu of LTC subject to incurring of specified expenditure.