Indians have always been considered as business-minded people. In India’s recent history, we have moved from an agriculture-based economy to a service-based economy. Startups have really been major contributors in doing so. However, making India a ‘startup-friendly‘ country will be our biggest challenge and biggest blessing altogether to achieve the $5 Trillion Economy landmark.

India has always encouraged startups. We have always tried to create a fertile environment for startups and businesses. Every year the Budget has ample announcements that enable startups to flourish.

Let us look at how the Budgets have treated their favorite prodigy- ‘Startups’ so far…

Budget 2018

Budget 2018 felt well-intentioned but partly fulfilled expectations. The Government made several announcements that made startups happy.

Prior to the Budget, Startups with a valuation of INR 50 Crore or more were required to pay corporate tax of 25%. The Government realized that this tax wasn’t allowing startups to grow at full potential and so they decided to increase the minimum valuation requirement to INR 250 Crore. However, we still lack behind in terms of the corporate tax. For Instance, the corporate tax in the USA and China is 21% and 20% respectively.

In conjunction with the previous announcement, Late Finance Minister Arun Jaitley gave startups another reason to be happy by announcing INR 1300 Crore for the telecom sector and digitizing India. It was a major problem for startups when they couldn’t grow due to a lack of proper Infrastructure. Surely, they would have sighed relief.

Have you heard the Quote, “Universe always balances itself out”? This quote was felt hard by the startups as they kept waiting for relaxation on Angel Tax but it never happened. One of the major reasons why Budget 2018 was criticized was because of the Angel Tax. Even in the pre-Budget predictions, think tanks had predicted relaxation on the issue. The Angel Tax issue was like the ‘Long Night‘. Surely this was a major Pain Nerve for startups.

Budget 2019

Just like in Game of Thrones, Jhon Snow did eventually defeated the ‘Night King‘. The feeling that he would have felt couldn’t be compared to the euphoria that Startups felt when Angel Tax was rationalized. CBDT came out with a notification in which startups would be allowed a retrospective effect on an exemption.

AOs will be required to get permission from its reporting officer and senior before scrutinizing any unregistered startup. Also on the Angel Tax front, an exemption was given u/s 52(2)(viib) to startups funded by Category-II AIF.

Budget 2019 announced an extension of 2 more years u/s 54GB. It allows exemption on Land Gains to Individuals and companies who used that amount to invest in a Startup. This announcement incentivized founders for funding in startups. Apart from that, the Government announced the extension of the Startup India Scheme up to 2025…two home-runs for startups!!

To boost the market for Electric Vehicles, reduced GST and IT rates were announced for Individual buyers and business owners. Also, the Government proposed 100 incubation centers which aimed at helping over 75,000 agriculture-based entrepreneurs. And 100% FDI was announced in the Insurance and Single Brand Retail sector.

It is safe to say that Budget 2019 was able to release the entrepreneurial spirit for startups…

Budget 2020

This year’s Budget was a special one! Often termed as a ‘Do-or-Die’ Budget, Nirmala Sitharaman’s take on the Economy was worrying to some folks.

But it still had a lot going for the startups. To address the concerns on tax holiday for startups, Section 80IAC was amended. The maximum turnover limit for startups to claim these deductions was increased to 100 CRore from 25 Crore. Along with that, the time limit to claim this deduction is also extended to 3 out of 10 previous years from 7 previous years.

One of the biggest announcements was the change in Tax Audit Applicability u/s 44AB. In FInMin’s bet to digitalize India, she announced an increased turnover limit from 1 Crore to 5 Crore, provided your cash sales and expenditures are less than 5% of total sales and total expenditure. Keep in mind, the due date for ITR filing of taxpayers to whom tax audit is extended from September 30 to October 31.

Hey, Tax Audit Applicability is usually a mind-bender for most people. This is why we have a Blog that will simplify Tax Audit for you. No more Tax Audit for Business/Trading Income having Turnover up to INR 5 Cr… Is it true?

Changes were announced for ESOPs as well. Earlier ESOPs were taxed twice-at the time of exercising ESOPs and at the time of selling shares. But now employees have been given relief by way of deferment of tax at the time of exercising options. This means an employee of startups who are exercising their ESOPs may have to pay tax at a later date i.e at the time of exit from the company or when they sell their shares or after 5 years of ESOPs being allocated. This announcement is especially important for startups as they can attract skilled talent with ease.

P.S If you wish to learn more about ESOPs and it’s taxability, we have a detailed article on How ESOPs are taxed in the hands of an Employee?

Since it was announced that DDT for companies will be abolished, startups will now have less tax compliance. But as DDT isn’t taxable in hands of companies/startups it naturally becomes taxable in the hands of shareholders. So, the impact of DDT being abolished can be left for speculation.

On the Corporate Tax front, great relaxation was given to startups and companies. The Corporate Tax rate for existing companies is reduced to 22% from 25% and the tax rate for Startups in the manufacturing sector was announced at 15%…..Rejoice Startups!!

However, the introduction of the ‘Optional New Tax Regime’ has created confusion not only in the minds of salaried individuals but also aspiring Startups.

So far we’ve talked in the context of startups, but their employees are scratching their heads over the ‘Old Regime vs New Regime confusion’. To ease out the confusion we took the liberty of doing some research for your better understanding….take a look- Budget 2020: Current Tax Regime vs New Tax Regime causing a stir for salaried Individuals!

Our take…

We feel that with every Budget, the ease of doing business in India is getting better. Well, the Government reduced the Corporate Tax rate for startups. But if we really want to compete on all fronts at the global level, and need to focus more on providing a fertile ground for our startups to grow.

We still lack in terms of proper infrastructure which could facilitate a steady growth of startups. However, as the famous saying goes, “Rome wasn’t built in a day“.

It is safe to say that we have a mountain to climb, and judging by the trend, the Government will continue to give paramount importance to startups.

All looks good from here…

It is no secret, that since FinMin announced the Union Budget 2020, salaried Individuals have been upset. Prior to the Budget, there was a lot of talk about how this Budget will be a game-changer and how it will help cease the economic unrest and provide stability. Well, it is too early to call judgment but it looks like an Underwhelming Budget nonetheless!!

Let us Understand the Trends of past Budgets and how Salaried Individuals have been treated so far…

Budget 2018

The Good

Honorable Late Finance Minister, Arun Jaitley made Salaried Individuals his Poster boy for the Budget. Huge reliefs were announced in the Budget for Salaried Individuals. A Standard Deduction (SD) of INR 40,000 was announced and the Medical Reimbursement of INR 15,000 and Transport Allowance of INR 19,200 were slashed.

In the Assessment Year 16-17, around 1.89 Crore salaried Individuals had filed their Reruns amounting to INR 1.44 Lakh Crore in tax revenues. The tax liability for Businesses was an average INR 25,753 per individual business whereas the tax liability for salaried Individuals was INR 76,306. To lower the Tax Burden for salaried Individuals Standard Deduction of INR 40,000 was introduced. Where it made the most impact was the fact that no proofs or bills would be required to avail the Deduction. This change was lauded dearly.

Anyway, Arun Jaitley garnished the cake for salaried Individuals with a cherry on top by reducing Tax for INR 2.5 lakh – INR 5 lakh to 5% from 10%.

Late FinMin made salaried women really happy when he reduced the EPF contribution for them to 8% from 12%. Women empowerment was made a priority by Jaitley and it reflected in his Budget.

The Bad

All is not Sunshine and roses. This phrase was never more relatable when Arun Jaitley announced hiked cess of 4% from the previous 3%. The revamped cess now included Health and Education.

For Salaried Individuals earning upto INR 3.5 Lakh, rebate u/s 87A was reduced to INR 2,500 from INR 5,000.

Budget 2019

The Budget for 2019 felt like a happy ending to a painfully bland movie. It was expected that Salaried Individuals will be given a lot of priority and so was the case…

The Good

There is a lot of good to talk about this Budget. For Starters, a full Tax Rebate u/s 87A (INR 12,500) was announced for Salaried Individuals up to INR 5 Lakh.

Apart from the Tax Rebate, Standard Deduction was increased from INR 40,000 to INR 50,000. This announcement could have made Salaried Individuals do a Mexican wave in their homes….pun intended!!. It was claimed that this increment will give benefits of INR 4,700 Crore to nearly 3 Crore salaried Individuals.

Deduction of INR 1.5 lakh u/s 80EEA for new home buyers was announced. Also, the Finance Minister announced rationalization on multiple commodities in the pre-GST regime.

For the environment-friendly individuals, an incentive was given out u/s 80EEB. Deductions upto INR 1.5 Lakh was given against interest taken on loan for electric vehicle.

The Bad

In 2019, Two Budgets were presented i.e the Interim Budget on Jan 30 and the Union Budget on July 5. Unsurprisingly, in the aftermath of the Interim Budget what was left was confusion, confusion, and…..(you guessed it) more confusion.

Another pain point was the increased surcharge rate. The maximum Surcharge that an Individual paid on earnings above INR 1 crore was 15%. However, two more slabs were added at higher rates. The highest surcharge imposed was on Income above INR 5 Crore at a staggering 37%.

Budget 2020

The Good

Anyways, we feel that Nirmala Sitharaman has given Taxpayers a choice to choose their preferred Tax Regimes as per their Financial Goals. Looks like the Government wants its citizens to take control of their own finances and plan accordingly.

Case 1 depicts that if you are a salaried Individual with Income up to INR 7.5 lakh, your Tax liability increases in the New Tax Regime as Total taxable income decreases in the Old Tax Regime because of various Deductions available.

As per Case II, if you fall under the High-Income slab your Net Tax Liability will be lower in case of the New Tax Regime.

The bad

Finance Minister Nirmala Sitharaman’s Budget in many cases was a do or die Budget. The pressure on her to revive our Economy is mounting, unemployment numbers are at all-time high whereas GDP is at a 13 Year low.

People wanted a Tax-Cut. Many renowned economists had predicted that a Tax-Cut would help revive the sluggish economy. But, against all wager, FinMin decided to pull a rabbit out of her hat!

She brought in an Optional Tax Regime. It is meant to boost the ailing economy, improve consumption, encourage investment and bring clarity to the people. looks like, she has left people all the more confused as to which Regime to Choose.

Btw: We have a Blog that Might help you decide which regime is better for you– Budget 2020: Current Tax Regime vs New Tax Regime causing a stir for salaried Individuals!

Apart from the ‘Which Regime should I Choose Conundrum?”, Salaried Individuals are left feeling ignored as a ‘Tax-cut’ didn’t happen. Now, they need to decide- Do they want to Claim Deductions? or Do they wish to have more Take Home Salary?. It’s a classic-Blue Pill or Red Pill situation!!

Salaried Individuals are disappointed as all Tax-benefits were scraped for New Home Buyers. And the biggest shocker of all is the decision of discontinuing 70 of the 100 Deductions that could previously be claimed Under Chapter VI A. This means that if an Individual decided to opt for New Tax Regime, he/she will have to forgo all Chapter VI A Deductions….that is a really tough choice.

P.S: If you are feeling Confused between the Regimes, we build a Tax Calculator which will help you decide what Regime suits you better.

Our Take

All in all, we would suggest to not be confused between the two regimes. The decision for which regime to choose should be made on these two factors:

• The Income Slab you fall under

• Your Personal finance Goals.

Due to the obvious benefits of classifying the Income accrued from Trading as Capital Gains, High net worth Individuals have always wanted to classify their Income from Trading as Capital Gains and not Business Income. But, looks like that it has been the case of preferences for the Government…

A History lesson

In most cases, the interest of Assessing Officers and CBDT has always been in treating Income from Trading as Business Income (as they are taxed at slab rates). Usually, taxability for High-Income Individuals is more when their Income from Trading is classified as a Business Income over Capital Gains.

Hence, the AOs used to treat the Income from Trading for FII’s as Business Income and taxed them at higher slab rates. Due to this, Foreign Investments weren’t growing at the speed that the Government wanted.

To address this issue, the CBDT published a circular stating that Income from Trading for FIIs will be treated as Capital Gains and not Business Income. To further boost Investments, it was announced that Income from F&O trading will also be considered as a Capital Gains for the FIIs.

The HNI situation

Investments from HNIs and Promoters are great contributors to the Economic Development and the Market. A Report from Fortune India states that the number of HNIs in India is expected to increase by nearly 88% in the coming 5 years. However, due to the recent sluggish economic trends, that figure has taken a hit. But since the economy is growing at snail’s speed, HNIs and promoters were expecting Tax reliefs in the Budget 2020. But it looks like the Government has preferred FIIs over Indian HNIs and promoters.

HNIs and Promoters are still confused as to how to treat their Income from Trading. If you wish to read more, we have a comprehensive Blog on that- Income from Trading: Is it Business Income or Capital Gains?

It’s a Numbers game!

let us Understand this scenario from a Taxation Point of View.

Let us assume that Jhon and Saurabh are friends. Jhon is a FII while Saurabh is a HNI. They have been buddies for long and talk regularly and share a common interest i.e Global Stock Markets. One time they had a debate regarding the taxability for FIIs and HNIs in India. Unconvinced, both of them decided to Trade worth INR 20 Lakh. Saurabh was surprised to know how much more Tax he paid on Trading Income. Unsurprisingly, Jhon was relatively happy as he paid INR 3,12,000 Tax as a Capital Gains Tax (15% +4% cess) while Jhon paid INR 4,24,000 Tax at Higher Slab rates.

Why the Bias?

It is safe to say that Investment in India has been increasing since the economic reforms. We have welcomed FIIs and also promoted HNIs to invest in our markets. But since 2018-2019 Markets and the Economy haven’t been up to the mark. India’s GDP is at 13-year low amid this situation.

CBDT’s decision to allow FIIs to treat their Income from Trading as Capital gains will make Indian Markets more competitive and encouraging. FIIs are the most powerful players who not only drive Domestic markets but also International markets. Hence it is rational to reduce their Tax Liability and attract more Foreign Investments.

When a country receives Foreign Investment…

• The economic situation of the country gets better

• Unemployment decreases

• Exchange Rates become stable

• Exports Increases

• Capital Flow Increases

While boosting Domestic Investment is always good for the long term, it isn’t entirely possible for India right now. As Markets face a liquidity crisis HNIs and Promoters will naturally refrain from investing in the stock market. So the CBDT had to conjure ways to keep the wheels churning.

Finance Minister Nirmala Sitharaman is expecting a huge inflow of foreign capital in her bid to make the Indian Economy Stable and push towards the $5 Trillion Economy.

What Stays & What Goes

A major chunk of deductions and exemptions are removed under the New Tax Regime. The important tax breaks that will no longer be available under the New Tax Regime include Chapter VI-A deductions like 80C, 80D, 80DD, 80U, 80TTA/TTB, 80E, HRA, LTA and interest on Housing Loan. There are a few deductions that can still be claimed!
Look at a list of all the deductions under the New Tax Regime which the Budget 2020 covers and does not cover!

Deductions we have to part ways with:

The most popular deductions of Chapter VIA have been abolished-

All deductions except 80CCD(2) and 80JJAA have been removed. The sections removed are:

• Investments – 80C, 80CCC, 80CCD(1), 80CCD(1B), 80CCG

• Medical Insurance – 80D, 80DD, 80DDB, 80U

• House Property – 80U, 80E, 80TTA/TTB, 80EE, 80EEA

• Donations – 80G, 80GG, 80GGA, 80GGC- Donations 

• 80IA, 80IAB, 80IB, 80IBA, 80IC, 80JJA, 80QQB, 80RRB. 

These include deductions on Life Insurance Premium, School Tuition Fees, Housing Loan Principal, Medical Insurance Premium & other investments like ELSS, NPS, and finally the majorly claimed Provident Fund.

PPF might still continue to be the most popular fixed-income product, irrespective of these changes.

Investment in PPF can no longer be claimed. The exemption on the interest earned through PPF as well as the total sum received at maturity is exempt from tax. This will give a boost to long-term investment planning. 

The huge deduction of medical insurance premium has been removed, too:

A deduction of INR 25,000 can be claimed under section 80D on insurance for self, spouse and children. An additional deduction for insurance of parents is also available. This depends on the age of the parents. The maximum deduction available u/s 80D is Rs. 1,00,000. This can only be claimed in the Old tax Regime.

Interest from savings bank account abolished:

This exemption is claimed under Section 80TTA and 80TTB. No more deductions in respect to interests from savings accounts is allowed. This applies to both senior and non-senior citizens.

No deduction for interest paid on education loan:

Under Section 80E, you can claim deduction on interest paid on education loan. It does not have any maximum limit. However, it can be claimed for a maximum period of 8 years under the Old Tax Regime. But this is also being excluded from the list of tax-deductions under the New Tax Regime.

Salaried individuals can no longer claim a large number of exemptions:

• House Rent Allowance (HRA) is normally paid to salaried individuals as part of their salary. This could be claimed up to a certain limit if the individual is staying in rented accommodation.

• Leave Travel Allowance (LTA) is the amount paid by the employer to an employee for travel expenditure with or without family within the country exemption. This is currently available to salaried employees twice in a block of four years.

• The Standard Deduction of INR 50,000 is currently available to salaried individuals. It can no longer be claimed under the New Tax Regime. 

• Transport Allowance and Entertainment Allowance are exempt from taxes too.

• Professional Tax is usually around INR 200 a month, with the maximum payable in a year being INR 2,500. The exemption on the same is also not available under the New Tax Regime.

• Housing Loan Interest paid for self-occupied properties can be claimed as a deduction under income from house property. This results in a loss from house property. This loss can be set off against salary income thereby reducing the taxable income and in turn the net tax liability.

A few other exemptions which were removed:

• Exemption available on Clubbing Income of Minor Child up to INR 1,500.

• Deduction available on Family Pension u/s 57(iia). The exemption of INR 15,000 or 1/3rd of the amount received, whichever is less, is available.

• Exemption in respect of Units establishment in SEZ u/s 10AA

Deductions that stay:

A little something under Chapter VIA can still be claimed:

These include Employer’s Contribution to Provident Fund (EPF) and deduction under section 80JJAA i.e. deduction for employment of new employees. 

Rebate Under Section 87A:

This rebate is limited to INR 12,500. This means that if your total income is lower than INR 5,00,000 then the tax payable will be your rebate under section 87A.

Standard Deduction on Rent Received still remains:

Standard Deduction on Rent Received is 30% of the Net Annual Value of Income from House Property. This 30% deduction is allowed even when your actual expenditure on the property is higher or lower.

Interest on Housing Loan for Let Out Property:

This deduction can still be claimed under the New Tax Regime unlike the Interest on housing loan for self-occupied property. However, you can only claim Interest upto the amount of Rental Income received. You can not set off or carry forward the loss of Interest paid on Housing Loan.  

Agricultural Income is not taxable. It is not counted as a part of an individual’s total income.     However, the ‘state’ government can levy tax on agricultural income if the amount exceeds INR 5,000 per year.

No compromise on retirement allowances to salaried individuals:

The following exemption are still allowed under the New Tax Regime:

• Amount received/receivable on voluntary retirement or termination of service or Voluntary Retirement Scheme (VRS)  is a method used by companies to reduce surplus staff. It is subject to exemption up to INR 5,00,000. The amount received up to INR 5,00,000 will be exempted and the balance amount will be taxable in the hands of employees under the head salary.

• Retrenchment Compensation is the financial compensation by the employer to an employee on terminating the employee’s job. This compensation which is received by a workman is exempt. It should not exceed the sum calculated on the basis provided in Section 25F(b) of Industrial Disputes Act, 1947 or any such amount as is specified by the Central Govt.

• Leave Encashment on Retirement is the amount of money received by an employee in exchange for a period of leave not availed. This amount is exempt from tax, subject to certain conditions and up to a maximum amount of INR 3 lakh.

• Commuted Value of Pension & Death-cum-retirement gratuity are other deductions which haven’t been abolished.

Few of the the exemptions which can still be claimed by the salaried individuals are Food Coupons and Gifts from Employer. Also Tax paid by employer on non-monetary perquisite can be claimed.

A few other exemptions which haven’t been removed:

• Life Insurance Premium received by the beneficiary is fully exempted from taxes

• Interest Received on Post Office Savings Account u/s 10(15) is exempt from taxes up to Rs.3,500 for single accounts and up to Rs.7,000 for joint accounts

• Money received as scholarship for education

• Cash received as awards constituted in public interest

• Short-term withdrawals and maturity amount from the National Pension Scheme (NPS)

• Interest and maturity amount received from PPF

• Interest and payment received from Sukanya Samriddhi Yojana

Budget 2020 made some really important changes to the Tax Regime. Taxpayers have two options. They can go with the New Tax Regime or the Old Tax Regime. There is nothing to worry about. Keep in mind the above. Select the suitable regime for FY 2020-21 so that maximum benefits can be derived. As a result your employer can deduct correct TDS once you have decided between the two.

In Budget 2020, Finance Minister Nirmala Sitharaman made an announcement that the Dividend Distribution Tax (DDT) will be abolished for Domestic Companies. As a result, the dividend income which was earlier exempt would now be taxable in the hands of the shareholder.

The changes made under TDS Section 194 and the introduction of new TDS Section 194K will surely send shock waves for resident traders/investors. Let us dig deep and understand what the fuss is all about.

Taxability of Dividend Income

Up to F.Y. 2019–20

Domestic Company was liable to pay DDT (Dividend Distribution Tax) at 15% on the amount of Dividend distributed to a shareholder. This dividend included dividend on equity shares and dividend on equity mutual funds. The dividend income was exempt up to INR 10 Lakh u/s 10(34) in the hands of the shareholder. Since the income was not taxable up to INR 10 Lakh, there was no applicability of TDS to avoid double taxation.

F.Y 2020–21 Onwards

Section 115-O has been abolished in the Budget. Thus, Domestic Companies are not liable to pay DDT (Dividend Distribution Tax) on the dividend distributed on Equity Shares and Equity Mutual Funds to shareholder resident in India…. Don’t jump off your seats in excitement just yet!!

Since DDT isn’t paid by the company, the Dividend Income is now taxable in the hands of the shareholder as per applicable slab rates…ouch! Now that the Income is taxable in the hands of shareholders, hence the TDS.

In Budget 2020, the following changes were made to introduce TDS on Dividend Income

• Amendment of Section 194
  Domestic Company should deduct TDS at 10% on dividend on equity shares in excess of INR 5,000.

• Introduction of Section 194K
  Asset Management Company (AMC) should deduct TDS at 10% on dividend on equity mutual funds in excess of INR 5,000.

What was the confusion then?

Apparently, Asset Management Company (AMC) was confused whether the Tax Deducted at Source (TDS) under Section 194K on “income” would be restricted to dividends only or also include capital gains? The Association of Mutual Funds in India (Amfi) did say that they would seek clarity from the income tax department on this issue.

There were two different School of Thoughts

• One School of thought says ‘Yes’, Capital Gains from Mutual Funds are also subject to TDS as Section 194K mentions ‘Income’ in respect of Mutual Funds should be liable to TDS @ 10%. And the definition of ‘Income’ as per the Income Tax Act includes ‘Profits and Gains’. So Unless a clarification is issued by the income tax department, the new tax proposal will apply to capital gains from mutual funds as well.

• Second School of Thought says ‘No’, Capital Gains from Mutual Funds are not subject to TDS. Equity Mutual Funds is a mutual fund that invests in equity shares of domestic companies. The Long Term Capital Gains from the sale of Equity Mutual Funds and Equity Shares is exempt from tax up to Rs. 1 lakh. So if the capital gains income is exempt, why is TDS required to be deducted on it?
  Further, a provision similar to Sec 194K existed in the Income Tax Act prior to Budget 2020. The word income in respect of mutual funds was interpreted as dividend income only and not capital gains.

Clarification Issued– However, this confusion was laid to rest by a Press Release by CBDT on 4th February. It has been clarified that a Mutual Fund is required to deduct TDS @ 10% Only on Dividend Payments and no tax shall be deducted on income from Capital Gains on Mutual Funds.

Our Interpretation!

According to Budget 2020, dividend income from equity shares and from equity mutual funds will now be taxable in the hands of taxpayers. Ergo, increasing your Taxable Income.

Also earlier, Dividend Income up to INR 10 Lakh was exempt, but according to Budget Proposal, the recipient of the dividend would be liable to pay income tax at applicable slab rates irrespective of the amount of dividend received.

With the abolition of DDT, people with income up to ₹5 lakh will not have to pay tax on dividend income.

We feel that since the Government is forgoing Tax Income of INR 25,000 crore by abolishing DDT for companies, they wish to attract Foreign Investors in the long run. We hope that this turns out to be fruitful for the Indian Economy.