One of the big announcements of the Union Budget 2020 was the introduction of the dual tax regime. Investors will have the leeway to select the tax regime that suits them best. Here are some of the major changes on the tax front.
All set for a dual regime
Essentially, taxpayers will now have two choices. They can opt for lower rates and forgo exemptions or they can keep the exemptions and continue with the existing rates. In the new regime, the government has reduced the number of exemptions from 100 to 30. The slabs have also been broken up in a more granular manner and the benefit of the new regime extends till the time your income is below Rs.15 lakhs per year. Beyond that level, the rates of tax remain the same. You need to opt for the appropriate regime of taxation.
Should you forgo exemptions?
The new system will entail that you give up on most of your regular exemptions like Section 80C, 80D, Section 24 and a host of others. While CPF, gratuity and retrenchment compensation will be on, there will be no additional benefits in the new regime including HRA, the standard deduction, and other allowances. In fact, even the tuition fees paid by you for the education of your children will not be admissible any longer. Of course, you have the choice of shifting to the new regime at a subsequent date too.
Taxation of dividends
There are some interesting changes pertaining to the taxation of dividends. Currently, equity dividends attract DDT at 15% with the effective cost at 20.56%. However, the DDT on equities and equity funds is being scrapped fully. The DDT on debt funds will, however, continue at the extant rates. Now any dividend earned by you on equities or on equity funds will have to be shown separately under the head of “Other Income”. These dividends will now be taxable at your peak taxation rate based on your total taxable income. Now, promoters and substantial holders may end up paying tax at 43.5% and that could be a dampener. In addition, all dividends will now be subjected to TDS at the rate of 10% at the time of payment.
To be fair, the Budget 2020 has also made its attempt to simplify the process for the taxpayer. Taxpayers will have a window under the “Vivaadh se Vishwas” scheme where they can pay just the disputed tax without penalty and interest by March 31st. The budget has also moved all income tax notices and even appeals to the impersonal model. But there will be one big advantage in shifting to the new tax regime. You will be saved the rigor of filing your tax returns as your returns will come pre-filled online. That should surely be something for taxpayers to cherish!