Budget 2021: Here's what taxpayers should take note of
Currently, withdrawal from overseas retirement funds by residents is taxable on a receipt basis in such foreign countries and on accrual basis in India, resulting in timing mismatch. A new Section 89A is proposed to be introduced to address this concern.
The Finance Minister presented Budget 2021 amidst unique circumstances. While as a country we have come out with vaccines for the pandemic, the economy is looking for a “V” shaped recovery, the common man has gone through the clutches of the pandemic both physically and mentally, and the global geopolitical climate is likely to have a bearing on our economy and its future.
Against this background, Union Finance Minister invoked Tamil poet Thiruvalluvar’s guidance on how a Government should levy tax.
Accordingly, our tax proposals too are based on few guiding fundamentals – improved compliance, efficient and transparent system and minimum government and maximum governance. Let us have a quick glance on the key Budget proposals impacting personal taxation.
Easing up compliances:
Budget 2021 proposes to exempt resident senior citizens who are 75 years and above in age, from tax return filing requirement. This relaxation is applicable if the individual has only pension and interest income received/receivable, from an account maintained with a specified bank from where they are receiving pension. The specified bank will consider the aggregate of pension and interest and will undertake appropriate tax withholding. For this purpose, the individual would have to furnish suitable declarations to the banker.
The Finance Minister also announced that the scope of pre-filling tax returns will be extended so as to include capital gains from listed securities, dividend income, and interest from banks, post office to further ease filing of returns. This is in addition to the salary and tax withholding details that are pre-populated in the returns filed.
Affordable housing and additional deduction:
To help first-time homebuyers, the existing deduction of Rs 150,000 in respect of interest on loan taken for residential property (stamp duty value not exceeding Rs 450,000), during 1 April 2109 to 31 March 2021, is extended till 31 March 2022.
Income from notified overseas retirement fund:
Currently, withdrawal from overseas retirement funds by residents is taxable on a receipt basis in such foreign countries and on accrual basis in India, resulting in timing mismatch. A new Section 89A is proposed to be introduced to address this concern. This may bring clarity on inclusion of income and availing of tax credits
While the above will bring smiles to individual taxpayers, there are a couple of proposals which may worry the taxpayer. For instance, in taxation of ULIP, Budget 2021 proposes to treat ULIPs issued on or after 1 February, 2021 as capital asset if the premium payable for any previous year exceeds Rs 250,000. The resultant gains will be taxed as capital gains which are presently exempted from taxation.
Importantly, the Budget proposes to tax accrued during the previous year, on employee contributions exceeding Rs 250,000 towards provident fund, in any year commencing from 1 April 2021. Presently, interest accrued on PF is not taxable so long as the individual has rendered less than five years of service. This proposal may disrupt the individual mindset towards investment in provident fund.
Prima facie, the Budget has neither increased nor decreased tax rates for individuals. However, the amendment towards taxing interest on provident fund contributions when the employee’s contributions are in excess of Rs 250,000, will lead to increased tax cost for salaried employees. This assumes significance in today’s environment when labour codes have already widened the definition of wages, resulting in increased contributions towards retirement benefits once implememented.
(Sudhakar Sethuraman is a Partner with Deloitte India and Kavitha Jagadeesan is a Manager in Deloitte Haskins and Sells LLP. Views expressed are personal)