Budget 2021: Income Tax Changes and Other Key Highlights

The wait is finally over! The Union Budget 2021 was presented by the Finance Minister Nirmala Sitharaman on February 1, 2021. Needless to say, everybody was hooked to the budget updates while the country still recovers from the pandemic-induced recession. In her speech, the FM spoke about the 6 pillars on which the proposals for this year’s budget rests upon. The 6 pillars holding Budget 2021 are –

1. Health & Well-being
2. Physical and Financial Capital and Infrastructure
3. Inclusive Development for Aspirational India
4. Reinvigorating Human Capital
5. Innovation and R&D
6. Minimum Government, Maximum Governance

Since the Finance Minister had promised a “never before” kinda budget, let’s take a deeper look on what were the changes introduced in the first-ever paperless Budget 2021.

Key Highlights from Budget 2021

While changes introduced in Budget 2020 are still in talks, let’s see what new changes are introduced in Budget 2021. 

Budget 2021 : Income Tax Updates

Relief to Senior Citizens

Senior Citizens aged 75 years and above, having income from pension/interest or both are exempt from filing Income Tax Return under Budget 2021. The paying bank will deduct TDS on the income.

Exemption from Tax Audit

According to Budget 2021, the taxpayers who carry out at least 95% digital transactions, the limit for Tax Audit has been increased from INR 5 Cr to INR 10 Cr. This limit was initially increased from INR 1 Cr to INR 5 Cr in Budget 2020.

Relief for Dividend Income

After the abolishment of DDT i.e. Dividend Distribution Tax under Budget 2020, dividend which was earlier exempt now became a taxable income. Under Budget 2020, TDS under Section 194 and Section 194K was introduced for deduction of TDS on dividend paid on equity shares and equity mutual funds. Under Budget 2021, the dividend paid to REIT / InvIT is now exempt from TDS.

Advance Tax liability would arise on dividend income only once the dividend is declared or paid since it is difficult for the shareholders to estimate the dividend income accurately.

Chapter VI-A Deductions

The eligibility of deduction u/s 80EEA for interest on home loan for affordable housing has been extended to 31st March 2022 from 31st March 2020. Thus, an individual taxpayer can claim deduction u/s 80EEA of up to INR 1.5 lacs for a home loan sanctioned between 1.4.2019 to 31.3.2022.

Pre-fill ITR

Under Budget 2021, the compliance of filing ITR for taxpayers has now become easier with the pre-filled XML. Details of Capital gains on listed securities, dividend income and interest income from banks, post office, etc would now be prefilled in ITR in addition to the details of salary income, tax payments, TDS, etc which were already getting pre-filled earlier.

Relaxation for NRI (Non-Resident Individuals)

The FM, in Budget 2021 proposed to introduce new rules to remove the hardship of double taxation for NRI Indians having accrued incomes in foreign countries. The new rules would focus on provisions of foreign income, DTAA, relief and tax credits under Section 90, 90A & 91.

e-Assessments and Easier Litigations

• At present, the AO can re-open the assessment up to 6 years which has now been reduced to 3 years to reduce the uncertainty for taxpayers.
• The government would set up a Dispute Resolution Committee where taxpayers with taxable income up to INR 50 lacs and disputed income up to INR 10 lacs can reach out thus reducing the litigations for small taxpayers.
• Introduction of faceless assessment and appeals by establishing the National Faceless Income Tax Appellate Tribunal Centre i.e. Faceless ITAT.

Corporate Changes

• Definition of small companies as per Companies Act 2013 has been revised to ease out compliances.
  1. Paid-up Capital increased from up to INR 50 lacs to INR 2 Crore
  2. Turnover increased from up to INR 2 Crore to INR 20 Crore
• The residency limit was reduced from 182 days to 120 days thus encouraging NRIs to incorporate OPCs in India. Earlier, only resident citizens were able to incorporate OPC in India.
• Earlier, an OPC was mandatorily required to convert into a private company or public company if their paid-up share capital exceeds INR 50 lacs or turnover exceeds INR 2 Crore in the previous three years. The OPCs are now allowed to grow with no paid-up capital and turnover restrictions.

Other Key Takeaways

• If the employer has deducted employee’s contribution towards provident funds, superannuation funds, and other social security funds but not deposited these amounts within specified time limits, it will not be allowed as a deduction for the employer.
• The eligibility for claiming tax holiday for startups increased by a year up to 31st March 2022. The exemption for capital gains for investment in startups increased by a year up to 31st March 2022.

These were the key highlights from Budget 2021 delivered on February 1st by the FM. Budget 2021 was much awaited by the country and it did not disappoint. Before the announcement of the budget, there were a lot of expectations from the country, keeping in mind the year we just had.

Budget 2021 Expectations

Let’s briefly look at expectations that had surfaced before the official announcement of Budget 2021.

Income Tax Changes

Work-from-Home Deductions

We expect the FM to provide deductions for various allowances employees received such as compensation for ergonomic workstations, internet, and mobile allowances, etc.
If the work-from-home norm is here to stay, it will be interesting to see Budget 2021 take on it. 

#Budget2021 Update: No specific WFH deductions allowed

Exemptions under New Tax Regime

The most talked-about change from the last year’s budget was the introduction of the New Tax Regime. However, the old tax regime continues to be favoured for its ability to claim deductions.

Considering this, the government may offer some more benefits under the new regime.

#Budget2021 Update: No new exemptions introduced under the New Tax Regime.

Chapter VIA Deductions

For those continuing with the old tax regime, there are chatters about an increase in the limit for Chapter VIA deductions the current limits u/s 80C – INR 1.5 Lakh and u/s 80D up to INR 50,000. The scope of section 80D could be broadened to include medical and insurance expenditure in wake of Covid-19.

#Budget2021 Update: Taxpayers can claim deduction u/s 80EEA of up to INR 1.5 lacs for a home loan sanctioned between 1.4.2019 to 31.3.2022.

Healthcare 

The country was unprepared for the pandemic and the healthcare workers were overwhelmed. The finance minister had allocated 1.28% of the country’s GDP for health in the last fiscal year. However, the pandemic-induced emergency exposed the shortcomings of the sector. 

Representatives from healthcare had urged the ministry to increase allocation to 2.5% in Budget 2021 to make healthcare accessible to all. Rational taxation on medicine and health expenses was expected. 

#Budget2021 Update: Rs. 35,000 Cr for COVID-19 vaccine allocated. A total of Rs. 64,180 Cr will be allocated towards the ‘PM Atmanirbhar Swasth Bharat Yojna’ over a period of the next 6 years.

Covid Cess 

With the Covid-19 vaccinations rolling out, the cost of getting the entire country vaccinated will be huge. Vaccinations are the need of the hour as eliminating Covid-19 will eventually lift the entire economy of the country. The government might introduce covid cess in Budget 2021 on higher income brackets to cope up with the cost of providing vaccinations to the whole country. 

Cess is a form of tax levied by the government for a specified amount of time in order to raise money for a specific purpose. It is imposed as an additional tax on top of the existing tax. 

#Budget2021 Update: No Covid cess levied.

Job Opportunities 

While the economy is gaining momentum, unemployment is still one aspect that Budget 2021 is expected to address. Globally, India occupies third place in startup generated-economy. To boost startups, the government must consider introducing more tax benefits. Subsequently, this will lead to more job opportunities. 

#Budget2021 Update: Capital gains exemptions for investors and tax holidays for startups extended by a year.

These are a few areas of focus that were expected to be included in Budget 2021. Some did make the cut and others were lost among more important matters. With the amendments introduced in Budget 2021, we can only hope that the economic trajectory goes up.