What are the Key Changes in Income Tax Rules 2020-21?
Tax regimes change every year to simplify tax administration for taxpayers. A few new changes were introduced within the Union Budget 2020. Among them was replacing prior ITR utilities, Java and Excel, with JSON utilities. However, it will not work with all types of ITRs, just ITR-1s and ITR-4s. All these changes will take effect from the fiscal year 2020-2021. Let’s examine other new tax rules and how they affect individual taxpayers.
Income Tax Rules for the Financial Year 2020-21: New Changes
- New tax regime vs old regime
- From the financial year 2020-21, individual and HUF taxpayers will have the option of a new tax regime under Section 115BAC. Tax slabs under the new regime are different from the old ones. An individual will be able to claim lower taxes under this new regime. However, unlike the old tax regime, this has fewer deductions.
- Additionally, the new tax regime mandates that every taxpayer, except the salaried taxpayers, will choose their tax regime in the first year itself. Then, unless they discontinue the business, they will not be able to change the same. Salaried individuals can, however, change their options every year.
- No exemption for a voluntary contribution of employee provident fund
- Formerly, if a taxpayer contributed to a provident fund on their own, the interest they received was exempt from tax. The exemption applied even if the contribution exceeded 12% of the taxpayer’s salary. However, new income tax rules limit the exemption for such interest to Rs 2.5 lakh. If the interest amount exceeds that amount, it is taxable.
- The employees have been given a benefit where the employer does not contribute to their provident fund. Employees can then claim interest exemptions up to Rs 5 lakh.
- Changes in investments in ULIP
- Earlier, tax exemptions were provided for maturity amounts where premiums payable were less than 10% of the sum assured. With the new rules, however, if the total premiums paid on ULIPs exceed Rs 2.5 lakh, such exemption won’t be available.
- In addition, capital gains realised on redemption of such plans will be taxed similar to equity products. The tax rate will be 10% without indexation.
- Additionally, these new rules will only apply to policies taken after February 1, 2021.
- Changes in ITR
- The first change is that citizens over 75 years of age who only earn income from pensions and interest from a single savings account are exempt from filing tax returns. Only a declaration needs to be provided to a specified bank, which will calculate income and deductions.
- Secondly, for all individual taxpayers, the ITR forms will come pre-filled with incomes such as dividends, interest from banks, and capital gains from listed securities.
- Thirdly, the deadline for filing belated returns or revised returns has been shortened by three months. Earlier, these could be filed with a late fee by March 31. However, now the last date for filing these is December 31 of that same year.
- Lastly, the Income Tax Act has been amended to add Section 206AB. In this section, if the taxpayer fails to file their income tax returns, they will be charged double the TDS rate as specified in the relevant provision of the Act, or 5%.
- Changes in dividend income
- Dividends received from companies or mutual funds are now subject to tax under Sections 194 and 194K of the Income Tax Act. It will be included in “Income from Other Sources”.
- Dividends exceeding Rs 5000 will be subject to 10% TDS. Furthermore, a deduction will be allowed for interest payments on borrowing for such investment, up to 20% of dividends.
- Additionally, the taxpayers will only need to pay the advance tax once the dividend has been earned. This move relieves the taxpayers of paying interest under advance tax obligations.
With all these changes, the main goal was to introduce more transparency into the tax structure of the economy as well as simplify tax compliance for taxpayers. Many companies also offer tools like an online income tax calculator to help you assess your income tax from the comfort of your home. In case of further clarification, you can also consult your financial advisor for the same.