Union Budget 2021 : Part II – Personal Income Tax Changes

I have covered 6 points under Income Tax proposals which will impact the salaried employees and other individual taxpayers.

Point # 1 Relaxation for a certain category of senior citizens from filing return of income-tax

It would have been a sincere Pranam to Senior citizens had the Government proposed that ‘there is NO TAX on Income earned by Senior Citizens from pension/interest’.

What is being done now is just a cosmetic change. If you ask me, the new proposal that a resident citizen of 75 years and above needn’t file an Income Tax Return is more painful than filing the return. How? Look at this?

 

Proposed SchemePresent Scheme
No need to file Income Tax Return if

  •  A senior citizen – 75 years or above
  •  Has pension and Interest income
  • Such income should come from a specified bank (both pension and interest are in the same bank)
  • Furnish a declaration
  • Submit 80C deduction proofs
  • The banker will compute Income Tax on the total income
  • Deduct actual tax liability by debiting his bank account.
Need to file an Income Tax return

  • Make a call to a CA or an accountant
  • They will file the return
  • Charge a nominal fee.

Friends, now tell me – which is better? Proposed scheme? If you think so, try it out and give your feedback!!!

Secondly, Senior citizens who have income from (a) House Property (b) business or profession (c) capital gain (d) income from other sources, etc., are required to file the return. They have no exemption. 

Point#2: Taxation of proceeds of high premium Unit-Linked Insurance Policy (ULIP)

Present situation – Under Section 10(10D), any amount received, including bonus, on maturity from ULIP Life Insurance policy is exempt if the premium paid per year is less than 10% of the capital sum assured. For example, Mr. Krishna pays Rs.3,00,000 as premium per year for a ULIP policy that has Rs.40 Lakhs sum assured. When Krishna gets this money back, the entire amount including the bonus is exempt from tax. (Premium per year is less than 10% of sum assured)

Proposed – Everything remains the same for people paying premium up to Rs.2,50,000 per year and in cases like Krishna’s

  • Where the premium is more than Rs.2,50,000 per year
  • for all such policies issued on or after 1st Feb 2021,
  • the maturity proceeds will be taxable
  • Similar to the tax rates applicable to Equity Linked Mutual Funds.

Why is this new rule introduced?

The Government feels wealthy people are paying huge premiums and availing tax exemptions. Allowing such exemption in policy/policies with huge premiums defeats the legislative intent of this clause. The intention was to provide benefit to small and genuine cases of life insurance

Takeaway – Make sure that ULIP premium towards ALL policies together is less than Rs.250000 to stay in the tax exemption zone.

Point # 3 Taxability of Interest on various funds where income is exempt

This new rule is to collect more taxes from the employees who contribute more than Rs.2,50,000 per year towards Employees Provident Fund (EPF) Scheme.

Present situation – Any interest earned in the EPF account is exempt from tax

Proposed – Any interest earned on an annual contribution in excess of Rs.2,50,000 is taxable. This can be explained with an example

Employee Contribution to EPF per yearInterest earned at, say at 8.50% p.a.Taxable Interest
2,50,00021,250NIL
3,00,00025,5004,250

 

The CBDT (Tax department) is empowered to provide the manner in which the computation of interest income is done. To get more clarity, we have to refer to the rules which will be framed soon.

Takeaway – There is no increase in the tax rates, but there is an increase in taxable income

Point # 4 Time limit to file belated Return of Income

This example will explain the point well. The Income Tax Return is to be filed for taxpayers (who are not covered under Tax Audits) on or before 31st July 2021.

Present Situation – Those who couldn’t file the return within the due date, are allowed to file the return on or before the end of 31st March 2022 (this is called a BELATED return)

Proposed – Now as per the new rule, the belated return can be filed on or before 31st December 2021. This means the last date of filing the return is reduced by 3 months. A similar rule is applicable for revied return also.

Point # 5 Additional deduction from the taxable income w.r.t. interest on the loan for the purchase of affordable housing.

An individual taxpayer can avail a tax deduction of Rs.1,50,000 per year u/s 80EEA towards interest paid on the purchase of a residential house –

  • which should be the first house (I mean, one should not own any other house property on the date of sanction of the loan)
  • The loan must be taken from banks or housing finance institutions
  • Stamp duty of the property should not be more than Rs.45 Lakhs

Present situation – The existing rule says, the loan sanction date should be on or before 31st March 2021

Proposed – The Loan sanction date is extended to 31st March 2022. This means the benefit of taking an additional interest of Rs.1,50,000 is extended by one more year!

Point # 6 Higher rate of TDS for non-filers

Special TDS and TCS provisions are introduced, applicable from 1st July 2021

The taxpayers who meet the following parameters,

  • who have not filed their Income tax returns for two consecutive previous years and the time limit for filing has expired and
  • having aggregate TDS and TCS (other than TDS from Salaries, EPF, Winnings from a lottery, horse race, investment in securitization trust) exceeding or equal to INR 50,000 in each of the two previous years
  • shall deduct higher of the following taxes as per Section 206AB
    • Twice the rates specified in the relevant provisions of the Act
    • At 5% and
    • Twice the rates in force

What does this mean?

Those who have TDS amount of Rs.50,000 per year have to file their Income Tax return or else, the payer like the Bank, will deduct a higher TDS, than the normal rate! Indirectly, the Government is saying, look if you have TDS of over Rs.50,000 per year, file your Income Tax return.

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About B E Kumar Prasad

B E Kumar Prasad
He is a Practicing Chartered Accountant at Bangalore, India. He has 26 years of experience in the areas of NRI matters, Income Tax, Setting up Business. He is also an Insolvency Professional and Registered Valuer (F&SA)He can be contacted at [email protected]

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Mahesh
Mahesh
1 month ago

Subtle provisions made in the budget brought out very well in simple to understand manner.

This government does not care for salaried, middle class and senior citizens. It is slowly destroying their efforts to build their old age security!

Sriram Iyengar
Sriram Iyengar
1 month ago

Budget explained very well in layman’s terminology. Thanks for your effort sir.

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