From bringing tax parity between ULIPs and mutual funds to taking away traditional tax-saving avenues of the well off, Budget 2021 aims to strike a balance.
Budget 2021 has touched a broad canvas of people. Here are the key takeaways for the investor, taxpayer, depositors, and common consumers.
There is good news for senior citizens. For those above the age of 75, filing income-tax returns is not required, the effective financial year 2021-22. But there is a small caveat. Those who earn income from pension and interest alone are exempt. But if you have an income from capital gains, investments in direct equities, or even mutual funds, then you have to file your income tax returns as usual.
Pay your taxes on time or face a penalty
You need to ensure that you stick to the specified timelines while filing income tax returns for the financial year 2020-21 (the assessment year 2021-22). This is because the additional period available to file returns later or rectify mistakes has now shrunk. “Belated or revised return can now only be filed until December 31,” says Amit Maheshwari, Partner, AKM Global. The due date remains July 31, but the ‘extra’ time to file belated or revised returns will be shorter for the financial year 2020-21. You cannot complete the process by March 31, as is the case now, but will have to wrap up the process by December 31, 2021.
Usually, you can file returns up to December 31 after a late-filing fee of Rs 5,000 and up to March 31 after shelling out Rs 10,000 as penal charges.
Easy compliance and redressal system
Pre-filled income-tax forms ensure that you don’t need to spend endless hours copiously filling them out. The FM announced in her Budget speech that now pre-filled income tax forms will come with details of your capital gains from listed securities and interest income from both banks and post-offices.
Anish Shah, Associate Partner-Transaction Tax, BDO India, says, “This will ensure accurate income disclosure by the assessee and will also save substantial time in preparing the tax return.”
Pre-filled forms have another hidden benefit. For the government. It enables tax authorities to cast the tax net wider and ensure that people do not evade taxes. As your income tax forms come pre-filled with your investment details, you cannot escape paying taxes on them.
Faster tax resolutions
The timeline for reopening of assessment under income tax returns will now go down to three years from six years presently. Only where there is evidence of concealment of income concealment of Rs 50 lakh or more in a year can the reassessment be opened in 10 years. This will ease the burden on the tax authorities and taxpayers, and pave the way for faster resolution of cases.
Not filing your tax return? Pay higher TDS
So far, only those who didn’t have a PAN were asked to pay a higher tax deduction at source (TDS) amount for rental income, bank interest, or even high-value transactions such as property. Come 2021-22, the one who has a PAN, but doesn’t file a tax return too would have to shell out a higher tax deduction/ collection at source.
Investment charter for financial products
In order to reduce mis-spelling, the finance minister announced the setting up of an investment charter. This charter would pertain to investors of all financial products. Details are awaited on this announcement, but this charter is expected to lay down the rights of investors.
Stick to short-term debt funds
To fund the various infrastructure programs, the government plans to borrow money from the debt markets. A sum of Rs 14 lakh crore (gross borrowing) for this financial year and another Rs 12 lakh crore in the financial year 2021-22. This has caused yields to rise and the prices of debt securities to decline. Stick to short-term debt funds for now.
Gold and silver become cheaper, as customs duties are cut to 7.5 percent from 12.5 percent. This should work in favor of gold buyers.
Higher contribution in EPF to attract tax
To ensure that the rich don’t get away from paying taxes by putting money in tax-free instruments meant for the middle-class, Budget 2021 has restricted the tax exemption for the interest income earned on the employee’s contribution to various provident funds.
If the employees’ contribution to the provident fund – be it statutory or voluntary – exceeds Rs 2.5 lakh per year, then the interest earned on this excess contribution will be taxable.
Contributions made on or after April 1, 2021, will be considered for taxation. The move will largely impact Voluntary Provident Fund (VPF) contributions. So far, entre interest accrued on provident funds was tax-free and so were withdrawals.
ULIPs taxed on par with equity mutual funds
The other move to tax the rich was made by making unit-linked insurance policies (ULIPs) proceeds taxable beyond a threshold annual premium.
Those ULIPs where you pay an annual premium in excess of Rs 2.5 lakh will now attract long-term capital gains (LTCG) tax. This will be applicable to ULIPs bought on or after February 1, 2021. Gains made on such policies will now attract short-term or long-term capital gains (LTCG) tax at redemption or maturity, at par with other equity-oriented investments.
“The provisions of section 111A and 112A would apply on sale/redemption of such ULIPs and they would attract 15 percent short-term capital gains tax (STCG) or 10 percent LTCG depending on the holding period,” says Chetan Chandak, Director, TaxBirbal.in. Equity investments qualify as long-term assets if held for more than one year.
However, proceeds received by the policyholder’s dependents on her death will continue to be tax-free.
Dividend considered only after you receive it
Investors would have to consider dividend income for advance tax only after they receive it. This clarification was essential as the record date of a dividend payment could fall between two quarters or two years. Now, instead of the record date, the investor would have to base the calculation on when she receives the dividend.
The easier process to claim deposit insurance cover
A better policy framework will be devised by the government and the Reserve Bank of India for bank depositors to claim the deposit insurance cover when their banks get into trouble. Last year’s Budget had hiked the deposit insurance coverage for bank depositors from Rs 1 lakh to Rs 5 lakh. However, so far, this amount is available only in cases where banks go for liquidation. The new mechanism will allow depositors to withdraw their money sooner. “This is a positive development and protects bank customers from the kind of situations we had seen in the recent past when the RBI had imposed a moratorium on banks and limited access to deposits,” says Adhil Shetty, CEO, BankBazaar.com
Infra funding via tax-efficient zero-coupon bonds
Soon, retail investors would have a new instrument to invest in. In order to spur infrastructure growth, Budget 2021 announced that infrastructure debt funds would now be able to raise funds by issuing tax-efficient zero-coupon bonds. Further details are awaited as to the extent of income-tax benefits that these bonds would give.
Budget 2021 has proposed an increase in customs duty on a number of items. Mahesh Jaising, National Leader & Indirect Tax Partner, Deloitte India says that the customs duties are in line with what was expected on two key focus areas. These are ease of doing business by way of reiteration of streamlining of customs processes and make in India via increases in duties on those products/ components for which there is a push for manufacturing in India.
“These rate changes seem aligned to those sectors where the PLI schemes have been announced; e.g., solar, auto components, mobile parts, and steel,” he adds.
On the other side, the budget has proposed reducing the customs duty on certain chemicals and precious metals.
Items such as gold, silver, and Naptha become cheaper. Petrol and diesel get expensive due to the agriculture and infrastructure development cess. Mobile phones and power banks also get expensive. The idea is to hike customs duty in order to motivate manufacturers to make these products in India.