Key Changes As Per Finance Act in Financial Year 2020

Key Changes As Per Finance Act In Financial Year 2020

Key changes come into effect for the Financial year 2020-21 (Assessment year 2021-22)

The current financial year began from 1st April 2020 and with it comes into effect the changes of the latest Finance Act 2020.

Some of the key changes, as announced in Budget 2020 coming to effect from 1st April 2020, which will interest every common man are listed as below: –

  1. New Tax slabs: – Key Changes

Effective 1st April 2020, as per the new provisions a new optional tax slab also comes into force along with the existing tax structure.

The individuals can opt to choose on either of the 2 tax slabs, depending on the suitability and requirement. However, if the assessee chose new tax slab, he/she will have to let go of several of the prescribed exemptions and deductions, like most of the deductions under Chapter VIA will not be available (except employer’s contribution to NPS and deduction under section 80JJA), house rent allowance, leave travel concession, standard deduction, entertainment allowance, profession tax, additional depreciation, interest on a loan with regard to self-occupied property. Further, loss from the let-out property shall only be eligible to be carried forward, etc.

Key Changes in New tax slabs as compared to earlier tax slabs are:

Income slabs (in Rs.)Rate of tax (%) (Under new regime)Rate of tax (%) (Under old regime)
Income up to 2.5 lakhNILNIL
2.5 lakh and up to 5 lakhs55
5 lakhs and up to 7.5 lakhs1020
7.5 lakhs and up to 10 lakhs1520
10 lakhs and up to 12.5 lakhs2030
12.5 lakhs and up to 15 lakhs                          2530
Income above 15 lakhs3030

The new regime tax slab will give more income in the hand of the assessee to spend since funds will be saved from being parked in tax savings schemes due to the non-availability of deductions. Having set a bar on claiming deductions/exemptions, this scheme may be beneficial to taxpayers who have not been claiming deductions earlier. On the contrary, there may be higher tax outflow under the new regime, as tax benefit on deductions may outweigh the reduced tax rates under the new regime.

In short, the introduction of the new tax regime has been an option to the taxpayer to judiciously decide and minimise the tax outflow.

  • Dividend Distribution Tax: -Till FY 2019-2020, the dividend was taxable in the hands of the company, in form of Dividend Distribution Tax (DDT), whereas the shareholders were exempt from paying the tax on dividends received as per section 115O, except where the dividend received was more than Rs. 10 Lakhs in a year. From FY 2020-21 the DDT has been abolished and so has been the exemption under section 115O. This effectively means that the dividend is taxable in the hands of the recipients/ shareholders and not the company who is paying the dividends. This will effectively mean more income tax paid by the shareholders/ receipts of the dividends. Further, if the amount of such dividends is more than 5000 per year, TDS @ 10% has to be deducted by the company. The individuals in the lower Tax bracket will gain, however,  those in the highest Tax Slab, will have to shell out a large sum of money as Tax.
  • Taxation of employer contribution to retirement benefits in excess of threshold limit: – Earlier provisions stated that the employer’s contribution in excess of 12% of the salary, contribution to NPS in excess of 14% of salary (Central Government employees) or 10% ( other employees) and superannuation Fund contribution in excess of Rs. 150,000 will be taxable in the hands of the employees.

Under the provision of the Budget 2020, the monetary limit of Rs. 750,000/- has been introduced in respect of the employer’s contribution to aforesaid schemes. Annual accretion by way of interest, dividend or any other amount of similar nature to the balance at the credit of fund or scheme shall also be treated as perquisite to the extent it relates to employer’s contribution. 

This will impact employees in high salary brackets more.

  • Ease of Taxation on employees of eligible startups: –From 1st April 2020 under Section 80IAC shares allotted to the employees of certain eligible startup businesses under ESOP or under employee stock ownership plan will not be taxable as perks at the time of exercise of the option. However, there would be a deferment in taxation and the taxes have to be paid in 14 days from the  following events, whichever occurs earlier
    • The date of resignation of the employees
    • Sale of shares by the employee
    • 48 months from the ending of the assessment year in which the option is exercised

This will defer the tax liability of the employees up to a maximum of 2 years. The employer will, however, be liable to deduct tax as per applicable provisions.

  • Limit for Audits under Section 44AB: – In a big relief to many small and medium scale businesses, from 1st April 2020, the threshold limit for mandatory Tax Audit under section 44AB has been increased from turnover of 1 cr. to 5 cr. However, for this increased threshold limit the overall cash transactions in terms of receipts and payments should not be more than 5% of the turnover. The limit for professionals, however, remains unchanged at Rs. 50 Lakhs for compulsory Tax Audit. Further, the last date for furnishing the Tax Audit report and filing the Income Tax return for Company, assesses liable for Tax Audit and the partners of a firm whose accounts are required to be audited has been moved from existing 30th September to 31st October.
  • Increase in safe harbour limit for real estate transactions: – form 1st April 2020, Section 43CA, 50C and 56(2)(x) provides that the consideration on transfer of land or building would be in accordance with the valuation as per the stamp duty valuation.  The safe harbour of 5% in this valuation was earlier available in this valuation. This has been increased to 10% from 1st April 2020. This will reduce the burden of tax on individuals. 
  • Cost of acquisition of assets acquired before 01.04.2001:- For the purpose of computing cost of acquisition of asset being land or building or both acquired before 01.04.2001, the fair market value (FMV) of such asset as on 01.04.2001 shall not exceed, wherever available, its stamp duty value as on 01.04.2001.

As validating the authenticity of cost of acquisition in each case may not be possible, this provision will restrict claim of Fair Market Value (FMV) as cost of acquisition where the stamp duty value is comparatively less. It may be noted that safe harbour provided under section 50C, 56(2) of 10% is not available under this section.

So, do keep in mind the key changes in tax slabs while planning your taxes in financial year 2020. Please consult experts to do the audits and accounting as per your requirement.