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.
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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.
The most feared and most awaited event of the year; The Budget. Every person, every industry waited patiently for the announcement from our respected Finance Minister Nirmala Sitharaman.
With COVID-19 pandemic on the backdrop, India was waiting for a “get well soon”.
Let’s see what the Budget 2021 brought forward for us – Decoding Budget 2021:
1. No changes in personal income tax
Budget 2021 did not alter the personal income tax structure which meant that the common man is not burdened with tax levy this time. However, we have tried to summarise a few pointers to understand the changes
2. No ITR filing for senior citizen above the age of 75 years
Budget 2021 dictates that Senior citizens above the age of 75 years need not file Income Tax returns henceforth. However, this exemption is valid only if the senior citizen has income from pension and interest.
Only snitch here is that the bank interest should have been received from the same bank where the pension gets deposited.
3. Prefilled Income Tax Returns
Ease of filing will be achieved as a result of Prefilled Income tax returns with the details of interest, dividend, capital gains etc. This is a welcome change since time will be saved and accuracy will be achieved.
Capital gains especially for trading in shares and mutual funds is a very cumbersome task. Prefilled details of capital gain will be a relief.
4. Dividend not required to be considered for determining the advance tax
The dividend has been made taxable only on the receipt or declaration of the same from the view of Advance Tax calculation.
Earlier the taxpayers would need to pay the interest due to underestimation of dividend income while calculating the advance tax. However, with the change in Budget 2021, the taxpayer need not consider dividend in advance tax calculation unless it is declared or paid. This will reduce the interest and penalty on advance tax payments of the taxpayers.
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5. Taxability of Interest on Employees Provident Fund (EPF) contribution
Interest on EPF contribution in excess of Rs. 2.5 lakhs, however, will be taxed only if withdrawn in such year.
This move is expected to divert the investors away from EPF, so that the investors would prefer to move in the funds to more lucrative options.
6. Double TDS rate where the taxpayer does not file Income Tax Return (ITR)
Budget 2021 has prescribed TDS at double rates where the taxpayer does not file Income Tax return.
This will encourage and push the non filers to file their ITR, which will increase the coverage of Income Tax.
7. Deduction for interest exemption of Affordable Housing remains unchanged this year too
The deduction will be allowed till the year-end i.e. March 2022, on the Affordable Housing Scheme for Rs. 1.5 lakhs.
This was a specific benefit given by Budget 2019, however, FM has reconsidered extending the same to the year 2021 is a positive sign for especially migrant workers and the lower working class.
Related article : How to select a suitable Tax regime for Yourself?
8. ULIPs brought into the tax net
Budget 2021 has brought in ULIPs under taxability net, prescribing that the capital gains on ULIPs will be taxable if the yearly premium is more than Rs. 2.5 lakhs.
ULIPs were having a specific advantage over regular ELSS (Equity Linked Saving Schemes) Funds due to no restriction on premium payments. However, with this amendment, ULIPs are pretty much at par with Mutual Funds.
9. Revision of return preponed by 3 months
Henceforth the taxpayers would be required to file the revised / belated returns by December 31st of every assessment year.
10. Rush start to Startups
Budget 2021 has boosted up the way ahead for the startups by prescribing some booster doses for revival and growth.
11. Removal of condition of waiting period for conversion of One Person Company (OPC)
Budget 2021 has removed the waiting period of 2 years for converting the OPC into a public limited company or private limited company.
12. No Cap on paid-up capital and turnover
Budget 2021 has eliminated the restrictions with respect to paid-up capital and turnover.
13. Non-Resident Indians (NRI) can incorporate OPC in India
This amendment will bring in the most required capital inflow in India especially in start ups.
14. Emphasis on healthcare
COVID-19 was an alarming state of events in the year 2020, which has reaffirmed the need to improve healthcare and sanitization activity.
15. Increased spending to 137% on Healthcare facilities.
Prime Minister Atmanirbhar Swasth Bharat Yojana will have competitive healthcare facilities with this spending.
16. COVID-19 Vaccine
FM has assured that more vaccines will be available soon and an amount of Rs. 35000 crores would be spent on vaccine efforts.
17. Privatisation, Divestment and Foreign Direct Investment (FDI)
Budget 2021 hs been truly an example of a progressive budget since it has talked in lengths and details about Divestment, privatization and foreign direct investment in government companies and public sector units
18. The monetisation of assets of PSUs
FM has announced that assets of Railways, Airports etc will be monetised through National Asset Monetisation Plan.
19. Disinvestment of PSUs (Public Sector Units)
List of PSUs will be made which are targeted for disinvestment and strategic disinvestment will be carried out to garner the funds
20. Changes in the Insurance Act to attract FDI (Foreign Direct Investment)
Budget 2021 has raised the FDI limit to 74% which was 49% earlier. This will attract more international players into the Insurance field due to allowability f foreign ownership.
21. Acche din for Government schemes
- Free Cooking gas
- Application of Minimum Wages Act to all workers inclusive etc.
Decoding Budget 2021 in all can be looked like more of an ambitious budget which has paved the way for the much sluggish economy bearing the impact of COVID19 hit. However, there is too less for the common man in terms of tax impacts and exemptions, apart from health and wellbeing concerns.
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