Finance Minister, Nirmala Sitharaman gave the longest ever budget speech on February 1, 2020.
What is a budget? In simple words, a budget is an estimation of the government’s income and expenditure for the upcoming financial year, in this case, the year starting April 2020.
Among other things, Budget 2020 has introduced a new approach to income tax. And this is relevant to most of us. We’ll discuss the key takeaways here in brief.
Income tax changes
This budget introduced a parallel method to calculate income tax. You can either opt to pay taxes as per the existing method or the new method, whichever is beneficial. Let us now understand the difference between the two methods.
Existing method
As per this method, income tax is calculated after availing all the deductions and exemptions available.
These are exemptions like house rent allowance, housing loan interest, leave travel allowance, standard deduction on salaried income and so on. Deductions are also available by investing in avenues listed under section 80C, PPF (Public Provident Fund), NPS (National Pension Scheme), ELSS (Equity Linked Saving Scheme), Life insurance and so on.
Through such an income tax scheme, the government encouraged savings. It acted as a guardian and handheld people to invest for their retirement, invest in equity markets, to get medical insurance, etc.
New method
The new scheme is an optional scheme in which you have to forego most of these exemptions and deductions and pay taxes at a lower rate.
This will work well for disciplined people. It is more flexible and you can invest wherever you want. This means the government now assumes that people are responsible enough to plan their investments. And hence there is no need to incentivize savings.
This new scheme will make income tax return filing very easy.
These are the tax slabs as per old and new scheme:
The new scheme is introduced to make tax filing hassle-free.
It also aims to boost the economy due to increased consumption. Due to lower taxes, there will be more disposable income resulting in higher purchasing power.
However, we have an option to choose the scheme that suits us best.
Apart from income tax, here are some other updates:
Deposit Insurance
The bank deposits insurance has been increased from ₹1 lakh to ₹5 lakhs. This means that if the bank fails, as was with the recent case of PMC bank, you will still be able to recover up to ₹5 lakhs of your fixed deposits as opposed to the erstwhile ₹1 lakh.
NRIs
The government is tightening rules for NRIs (Non-resident Indians) who are not paying taxes in any country. So, if an Indian citizen, who is an NRI as per Income Tax Rules, has not paid any tax in any other country, will now have to pay taxes in India.
Further, to qualify as a non-resident, one of the conditions was to stay outside India for more than 182 days earlier. This has now been increased to 245 days.
Start-ups
In the previous budget, the government had addressed a lot of issues related to start-ups. One additional benefit was announced this year for the employees working at start-ups. They have an option to defer taxes on ESOPs by five years or till they leave the company or when they sell their shares, whichever is earlier.
Tax on Dividend
Earlier, companies deducted a flat rate while distributing dividends (Dividend Distribution Tax or DDT). This was not a good system since we always received dividends after a tax-cut. So it has now been abolished. Instead, we’d be paying tax on dividends received as per our tax bracket, which is a fair move.
To sum up, Budget 2020, aims to boost an individual’s income as well as purchasing power. This will hopefully revive domestic economic growth that has slumped to the lowest in a decade. As regards the tax structure, we recommend sticking with the existing scheme only if you’re utilizing the exemptions and deductions well. If not, the new scheme is a great way to simplify your taxes.
Drop in your queries in the comments below. We’ll be happy to sort them out.
