Budget Highlights 2020: Keys changes impacting Investors and Taxpayers.

Budget 2020

This budget speech was the longest speech so far where Finance Minister introduced many changes for the taxpayers, Investors and Business. Here are some Budget Highlights 2020.

Abolishing DDT (Dividend Distribution Tax)

Dividend Distribution Tax is the Tax levied to the companies when a dividend is distributed to shareholders.

Budget 2020 has abolished the DDT and has shifted the tax burden on the recipient, that is on the shareholder. Now if you receive the dividend in excess of Rs 5000 it will be taxed as per the income tax slab.

The dividend is exempted up to Rs 5000. This may be negative for the domestic investor as it was the only exempted income after introducing a tax on long term returns.

However, many financial experts believe this is a good step to boost foreign investment in India and reducing a small burden of DDT on companies (Mostly insurance companies)  paying the dividend to investors.

Shifting tax in the hands of investors will automatically put them in a higher slab rate. Dividend payer has to deduct TDS on dividend paid to the investors or shareholders will become much-complicated process.

New Tax Slab

New tax slab introduced in Budget 2020 is an optional scheme where the taxpayer has to choose from the old scheme and the new scheme.

However, for the new scheme, taxpayer need to sacrifice the deductions such as Leave Travel Concession (LTC), House Rent Allowance (HRA), Standard deduction, Interest on housing loan for respect of self-occupied property, deductions of up to Rs 1.5 lakh available for specified investments/expenses availed under the popular section 80C, donations to charitable organisations, deduction for medical insurance premium, etc.

Comparison of the new scheme and old scheme for filing the income tax return for AY 2021-22

Tax Slab

Tax Liability For Indians in Abroad.

This move will create panic among the NRI’s not liable to pay tax in other countries where they are earning because now they are liable to pay tax in India. If the income of NRI is taxed at the current slab, they will have to pay a higher tax on the income earned abroad.

Changes in determining Residential status of the Taxpayers

Residential Status of Taxpayers determined under current tax laws is if an individual stays in India for at least 182 days then he is an Indian resident. But now after according to finance bill 2020, days are reduced from 182 to 120 days. 

Further residency is categorised in two forms – Ordinary Resident and Not- Ordinary resident.

NOR eligibility criteria include if an individual has been non-resident in India in 7 out 10 preceding tax years (earlier it was 9 out of 10 preceding tax years or stay in India for 729 days out of 7 preceding tax years).

Sale of Stake in LIC and IDBI

The government was able to raise only 18000 crores against the target of 1.05 lakhs crore in FY 20. Recently, the government sold the stake in Railway Vikas Nigam and IRCTC, now sale in LIC and IDBI will make the target more realistic.

The government holds 100 per cent stake in LIC and according to SEBI regulation needs minimum 10% dilution, which can make this IPO the largest IPO.

However, the market considered it negative as LIC broke nearly 12 per cent on 01 Feb. We believe this move is positive as it will bring more transparency to the operational level.

We have seen AirIndia and BSNL losing their value in the stock market which would not have happened if the government would have privatised the company.

Further, the govt has planned to sell the entire stake in the IDBI bank (IDBI stock was trading higher as much as 10% on 1 Feb 2020)

Increase in Deposit Insurance.

Now you will get insurance of Rs 5 Lakhs if you bank burst instead of 1 Lakh earlier.

This is the most welcome move, as we have seen recently in the PMC bank crisis.

This move may bring certainty among the senior citizen to invest in the Fixed Deposit and in return liquidity in Banks

 

Taxability on Employers Contribution

According to current rules, there is no tax for the contribution made by the employer irrespective of the limit mentioned.

But according to Finance Bill 2020 now the extent to which the employer contribution is Rs.750000 and above that it is taxable. We have not received further clarification on what rate of tax could be applicable. 

Conclusion

The overall budget of 2020 has a big vision, the government is pushing harder to make the economy right. But the market was expecting a focus on Auto sector and realty sector. Realty sector cracked 7% on the budget day.  Our FM Nirmalaji Sitaram tried to shift the burden of the corporates on the common man (For example DDT). New tax slab is attractive but one has to forgo the deduction to fit under that regime

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