Union Budget 2021 Highlights Income Tax India

In her third budget presentation for the financial year 2021-22, the Finance Minister, Nirmala Sitharaman, left the income tax slabs and rates unchanged. This means that the income tax slabs of the previous financial year would continue to carry over onto the FY 2021-22 as well.

Nevertheless, certain direct tax proposals were introduced to make compliance, litigation and income tax proceedings easier for the assessee.

Direct Tax Reforms

Here are the proposed amendments in the direct tax segment.

1.Senior citizens aged 75+: Exemption from filing income tax returns

• Senior citizens who are 75 years of age or over and receive only pension income and interest on deposits shall be exempted from filing their annual income tax returns.

• This would significantly reduce the burden of compliance that they would have otherwise had to endure during each financial year.

• The proposal also puts the onus on the banks and financial institutions to deduct the necessary tax from the concerned senior citizens’ interest income. This deducted tax would then be deposited with the income tax authorities on behalf of the concerned senior citizens.

How this could impact you:

If you are aged 75 or above and only earn interest and/or pension income, you need not file IT returns hereafter.

2. Section 80EEA deduction extended

• Section 80EEA provides for the deduction of interest paid on home loan for affordable housing - up to Rs. 1.5 Lakhs.

• The eligibility for this deduction has been extended till March 31, 2022.

How this could impact you:

Say you’ve availed a loan to purchase a house under an affordable housing project. And say, for instance, that the interest paid on the said loan during the financial year 2021-22 is Rs. 90,000. In this case, you are eligible to claim the interest paid - Rs. 90,000 - as a deduction from your total income under section 80EEA.

3.Interest on employees’ contribution to EPF to be taxed

• Interest on employees’ contribution to EPF will be taxable, if the contribution during any year exceeds Rs. 2.5 Lakhs.

• This is applicable for contributions on or after April 1, 2021

How this could impact you:

Say you earn Rs. 30 Lakhs per year. And say, for instance, that you contribute 10% of your salary to the Provident Fund. In this case, that would mean you contribute Rs. 3 Lakhs each year. So, as per the new amendments, interest earned on Rs. 50,000 (i.e. on contributions exceeding Rs. 2.5 Lakhs) would be taxable.

4. Proceeds from ULIPs now taxable

• Proceeds from ULIPs will be taxable as capital gains, where the amount of premium paid exceeds Rs. 2.5 Lakhs in any year.

• This is applicable for ULIPs issued on or after February 1, 2021.

• In case a taxpayer pays premiums for more than one ULIP, the aggregate premium payments for all such ULIPs must be considered to check for taxability.

• Proceeds received on death are not taxable.

How this could impact you:

Let’s say you purchase a ULIP on March 4, 2021. The annual premium charged for the plan is Rs. 3 Lakhs. The tenure of the ULIP is 15 years. At the end of the tenure, in the year 2036, you withdraw your maturity benefits. At that juncture, the proceeds from your ULIP would be taxable, since the annual premium exceeds Rs. 2.5 Lakhs. Alternatively, in case your nominees receive the proceeds following your unfortunate demise, such gains would be exempt from tax.

5. Increase in tax audit limit

• The limit for tax audits under section 44AB of the Income Tax Act, 1961, has been increased from Rs. 5 Crore to Rs. 10 Crore.

• This is only for assessees who carry out 95% of their transactions digitally.

How this could impact you:

If you are an individual carrying on a business, or if you are a professional, you will only fall under the purview of tax audit under section 44AB of the Income Tax Act, 1961, if your turnover exceeds Rs. 10 Crore. Bear in mind that this is only applicable to you if you carry out at least 95% of your transactions through digital channels. Otherwise, the old limit of Rs. 5 Crore will apply.

Other Direct Tax Proposals

1. Reduction in time for IT proceedings

• The time limit for reopening income tax assessments has been reduced to 3 years (from the earlier limit of 6 years).

• Only in cases of serious tax evasion, where there is evidence of concealment of income of Rs. 50 Lakhs or more in a year, the assessment can be reopened up to 10 years.

2. Faceless Income Tax Appellate Tribunal (ITAT)

• This budget proposed to establish a National Faceless Income Tax Appellate Tribunal Centre, so that all communication between the Tribunal and the appellant will be electronic.

• This move is expected to reduce the cost of compliance for taxpayers and also increase transparency in the handling of appeals.

3. Relaxation for NRIs

Rules for removing the burden of double taxation on NRIs are to be notified.

4. Pre-filling of income tax returns

To make filing of IT returns easier, the details of capital gains from listed securities, dividend income, and interest from banks, post offices, etc. will now be pre-filled.

5. Disallowance of deduction for employers

• In cases where the employees’ PF contributions are deducted but not deposited by the employers, such amount will not be allowed as a deduction for the employers.

• This is expected to encourage employers to promptly deposit employees’ PF contributions within the time specified, so there is no loss of interest or income for the employees.

Tax Slabs And Rates For FY 2021-22

Since the Union Budget for 2021-22 left the tax slabs unchanged, as the taxpayer, you would get to choose between either the old tax regime or the new tax regime notified in Budget 2020.

Here’s a quick run-through of the income tax slabs and rates applicable for the financial year 2021-2022.

Income tax slabs and rates for FY 2021-2022 under the old regime

Income tax slabs and rates for FY 2021-2022 under the new regime

Indirect Tax Proposals

The budget for 2021-22 saw the revision of customs duty for several items. Here are the highlights of the indirect tax reforms introduced.

Duty on solar products

• Duty on solar inverters increased from 5% to 20%

• Duty on solar lanterns increased from 5% to 15%

Impact:

Installation of imported solar inverters and purchase of imported solar lanterns could get more expensive for the end user.

Gold and silver

• Basic customs duty on gold and silver has been reduced from 12.5% to 7.5%.

Impact:

This could bring down the prices for gold and silver in the near future, once the demand stabilizes.

Petrol and diesel

• Agriculture Infrastructure And Development Cess (AIDC) has been newly imposed on price of petrol at Rs 2.5, and on diesel at Rs. 4 per litre.

Impact:

It remains to be seen if this move would result in an increase in fuel prices. Adjustments in profit margins may keep the prices from rising steeply.

Leather imports

• The exemption on import of certain kinds of leather will be withdrawn, as they are domestically produced.

Impact:

This could improve the domestic market for these leather products and bode well for the MSMEs in this space.

In a nutshell

While there have not been any major reforms in the direct tax segment, there have been small changes that the taxpayer will need to pay attention to. The revision in taxability of ULIP proceeds and EPF contributions are particularly crucial for HNIs who may contribute upward of Rs. 2.5 Lakhs per year in these investment avenues.

Further, in the indirect tax segment, Budget 2021 focused heavily on rationalizing customs duty, in an effort to boost local manufacture of various items. This could benefit MSMEs in the manufacturing sector, since the demand for local products may witness a rise. 

You may also like to read about:

• Budget 2021 Highlights

• Summary of Union Budget 2021

• Union Budget 2021 Winners & Losers