Union Budget and Direct Taxation

Updated: 20-05-2024 09:59:59 AM

Union Budget 2020 announced a number of changes in the direct taxation regime. Read this article to know what has changed with respect to personal income tax for individuals, dividend distribution tax and corporate tax for FY 2020-21. 

Changes in Personal Income Tax

Union Budget 2020 announced a new income tax regime for individuals in an attempt to simplify the tax filing procedure. Although the new regime allows significant reduction in slab rates, it comes at the cost of tax concessions. Please note that the new income tax regime is optional and you can opt for the old (existing) regime to claim various tax exemptions. 

The following table shows both the old and new income tax regimes. 

Income Slab (Rs.)	Existing Slab Rates	New Slab Rates  (FY 2020-21 onwards)
0-2.5 lakh	Exempt (NIL)	Exempt (NIL)
2.5-5 lakh	5%	5%
5-7.5 lakh	20%	10%
7.5-10 lakh		15%
10-12.5 lakh	30%	20%
12.5-15 lakh		25%
Above 15 lakh		30%

Please note that that you have to let go of the various income tax deductions in the new regime to claim the lower slab rates. Thus, you should first calculate the total tax outgo under both the regimes, and then select the more suitable one. 

Dividend Distribution Tax 

In effect Budget 2020 has scrapped DDT i.e. dividend distribution tax which was payable by companies paying dividend to its investors. The following is a comparison of the old vs. new regime: 

Before Union Budget 2020	After Union Budget 2020
Dividend Distribution Tax (DDT) was paid by companies at the rate of 15% (plus applicable cess and surcharges)	Dividend Distribution Tax will now be paid by the recipients/ shareholders at the applicable income tax slab rate. (w.e.f. FY 2020-21)

Concessional Tax Rate for Electricity Generation Companies

Concessional corporate tax rate was introduced for manufacturing companies in September 2019. A concessional corporate tax rate of 15% is now applicable for the newly incorporated domestic companies in the manufacturing sector, which start manufacturing by 31st March, 2023. 

Union Budget 2020 introduced a similar tax cut for electricity generation companies. From FY 2020-21 onwards, new domestic companies involved in electricity generation will have to pay corporate tax at a concessional rate of 15%.

Tax Concession on Foreign Investments

• Foreign investments made by the Sovereign Wealth Fund in infrastructure and other notified sectors before 31st March, 2024 with a minimum lock-in period of 3 years will get 100% tax exemption on interest, dividend and capital gains income.
• The period for concessional withholding tax rate under section 194LC has been extended. The rate of 5% for interest payment to non-residents for money borrowed and bonds issued will now be applicable till 30th June, 2023.
• Similarly, the period for concessional tax rate of 5% under section 194LD has been extended to 30th June, 2023. This is applicable for interest payment to Foreign Portfolio Investors (FPIs) and Qualified Foreign Investors (QFIs) with respect to bonds issued by Indian companies and government securities. Moreover, it is applicable for interest payment made on Municipal Bonds.
• The withholding tax for interest payment on the bonds listed at IFSC exchange has been further reduced to 4% from 5%.

Tax Changes for Start-ups

• For Start-up Employees: Start-ups generally use Employee Stock Option Plans (ESOPs) to attract and retain highly talented employees. Currently, ESOPs are taxed as perquisites, which lead to a cash-flow problem for the employees who hold these ESOPs over the long term. Budget 2020 has announced deferment of tax on ESOPs for 5 years or till the employees leave the company or till they sell their shares, whichever is earliest.   
• For Start-up Owners: The turnover limit to claim 100% tax deduction on profits for eligible start-ups has been increased from Rs. 25 crore to Rs. 100 crore. Moreover, the period of eligibility to claim this deduction has been increased from 7 years to 10 years.

Concessional Tax Rate for Co-operatives

• Co-operatives are now exempted from Alternate Minimum Tax (AMT) just as companies under the new tax regime are exempted from Minimum Alternate tax (MAT).
• Moreover, an optional tax rate has been introduced for co-operatives. As per this option, they will be taxed at 22% plus 10% surcharge and 4% cess with no exemptions/ deductions. At present, they are taxed at 30% with surcharge and cess.

Tax Changes for Medium, Small and Micro Enterprises (MSMEs)

The turnover threshold for getting the books audited has been increased from Rs. 1 crore to Rs. 5 crore in order to reduce the tax burden on small shopkeepers, traders and retailers who comprise MSMEs. However, the increased limit will apply only to those businesses which carry out less than 5%  of their business in cash to promote cashless economy.

Direct Tax and Affordable Housing

• Date of getting a home loan sanctioned to claim deduction on interest component has been extended by one year to realize the goal of “Housing for All”. As a result, you can claim tax deduction up to Rs. 1.5 lakh for interest paid on affordable housing loans sanctioned till 31st March, 2021.
• Further the date of approval for affordable housing project to avail tax holiday on the profits earned by developers has been extended by 1 year, i.e., 31st March, 2021. 

Tax Concession on Real Estate Transactions

At present, income form capital gains, business profits and other sources in respect of real estate transactions is counted as income for both the purchaser and the seller and taxed if the consideration value is less than the circle rate by more than 5%. In order to provide a boost to the real estate sector, the limit has been increased to 10% from 5%.

Tax Regime Change for Charitable Institutions

• As charitable organizations play an important role in the society, their income is fully exempt from taxation. Moreover, donors can claim tax deduction for donations made to these organizations.
• At present, a donor is required to fill out the complete details of the donee in the ITR to avail tax deduction. In order to simplify this process, the donee’s details will now be pre-filled in the donor’s ITR on the basis of information provided by the donee. 
• From FY 2020-21, charitable institutions have to electronically register with the Income Tax Department to claim tax exemptions. Under this new process, a unique registration number (URN) will be issued to all the new and existing charity institutions.