Income Tax


Budget 2021

The Finance Minister started her Direct tax proposals remembering the tax-friendly measures introduced by her prior to few months of the pandemic. She also mentioned that the number of returns filed has seen a dramatic increase to 6.48 cr from 3.31 cr in 2014. So, in a span of 6 years, the number of tax returns filed has almost doubled. Thanks to the demonetization and implementation of GST, amongst other things. 

Coming to the current budget 2021, the following are some of the amendments impacting individuals.

Interest on PF contributions

Currently, the withdrawal of accumulated balance (i.e., both principal and interest) in the provident fund is generally exempt provided the contribution has been made for a continuous period of 5 years. It is proposed to tax the interest income accrued during the year which is attributable to the contributions made by the taxpayer (i.e., employee contribution) in excess of Rs.2,50,000. This may have huge impact on the voluntary contributions made by the employees. Such employees may need to rethink contributions beyond Rs.2,50,000 and could explore alternative investments that may provide for higher returns than the provident fund.

Impact on proceeds from ULIPs having huge premiums

Hitherto, there was no tax on the proceeds of ULIP if the premium payable did not exceed 10% of the actual sum assured. Budget 2021 proposes to tax the proceeds from ULIPs issued on or after 01 Feb 2021 if the premium payable exceeds Rs.2,50,000 even though such premium is less than 10% of the actual sum assured. However, this is not applicable if the sum is received on the death of a person. Since the intention of exemption currently provided is to benefit small and genuine cases of life insurance, it is proposed to tax high net worth individuals who were investing in ULIPs with an objective of investment and not from risk coverage.

Indian residents having income from foreign retirement funds

Individuals who are residents and ordinarily residents’ in India and having income from foreign retirement funds were facing huge hardship due to the mismatch in the year of taxability of income from such funds. Since these individuals are taxable on their global income, the income on such retirement funds was taxable in India in the year of accrual. However, in most cases, the withdrawals may be taxed in the other country on a receipt basis. So, there is an absolute mismatch in recognising the income for taxation purposes and many times such individuals may end up paying taxes in both countries. To remove the genuine hardship, the Budget 2021 proposes to prescribe the manner in which such income should be taxed from the specified retirement funds. Considering the difficulties faced by such taxpayers, this amendment is a welcome move and expected to avoid the double taxation impact on such individuals. Hope the widely held accounts like US IRAs and 401Ks will get included in the list of specified funds.

Advance tax on dividend income

An individual needs to pay advance tax in four installments. For this purpose, the income needs to be estimated and if there is excess or shortfall, the same can be adjusted in the subsequent installments. Interest will be applicable for a shortfall of taxes if any. However, for certain incomes like capital gains etc. taxpayers can pay the advance tax in the installment coming up after the capital gain transaction without paying any interest. Since the income of such nature cannot be estimated, this relaxation has been provided. Now dividends also are coming under this list i.e., advance tax on dividend income can be paid only subsequent to the receipt of such dividend. This will ease the taxpayer from the burden of estimating the dividend income for advance tax purposes.

Sale of the residential unit by builders or developers

Currently, if the sale price of a residential property is lower than the stamp duty value or circle rate, the stamp duty value or circle rate is considered as sale price and accordingly, the profits are determined for tax purposes in the hands of such builder/developer. Parallelly, the same amount is taxed in the hands of the buyer of such property under the head ‘income from other sources. However, this is not applicable in cases where the difference between the actual sale price and stamp duty value does not exceed 10% i.e., for the stamp duty the value can be up to 110% of the sale price of the property. The budget 2021 proposes to increase this 10% to 20% for both the seller and buyer if the following conditions are met.

  • The sale of the residential unit takes place between 12th Nov 2020 to 30th June 2021
  • The sale is that of a new residential house
  • The sale consideration does not exceed rupees two crores

This is introduced to boost the demand in the real estate sector and to enable the developers to liquidate their inventory.

Extension of time limit for sanction of loans in case of affordable housing

As per the existing provisions, an additional deduction of Rs.1,50,000 is available towards interest on a loan taken for a residential house property if the loan has been sanctioned between 01 April 2019 to 31 Mar 2021. It is proposed to extend this period till 31 Mar 2022. The additional conditions like the stamp duty value of the property cannot exceed rupees 45 lakhs and the taxpayer does not own any residential house property on the date of sanction of loan, need to be satisfied.

Exemption from tax return filing for a certain category of senior citizens

It is proposed to exempt senior citizens who are of the age of 75 years or more from tax return filing provided the below conditions are met: 

  • Such senior citizens have an only pension and interest income
  • Such income should be from the specified banks.
  • Interest income should be from the same bank in which they are receiving  pension
  • Such banks have deducted adequate taxes on the above income

Though the intent of the above proposal is laudable, one needs to see to what extent this will ease the compliance burden of senior citizens since the conditions may rarely be met by them.

Procedural changes

The budget 2021 also proposes the following procedural changes:

  • The time limit for filing belated/revised return has been reduced by 3 months. For example, the belated or revised return for the FY 2021-22 can be filed upto 31 Dec 2022
  • The limit of turnover for tax audit purposes is proposed to increase to 10 crores where 95% of receipts and payments are done through digital mode
  • Going forward pre-filled returns cover capital gains, dividends, etc.
  • Dispute resolution committee to be set up to reduce litigations for small and medium taxpayers.

This budget appears to be simple and has minimal impact on individual taxation. There were series of amendments made to income tax laws during/post-pandemic and this could be one of the reasons for such a simple budget.

Maze of Tax Laws

Albert Einstein once expressed that if there is one thing in the world that is difficult to understand, that is Income Tax.

The landscape of Indian Income Tax is no exception, with the maze created by taxation of notional income, retrospective amendments, and somewhat contradictory court decisions – life does get complicated.  You may think, why so much of complications should exist, and can’t it be simpler.  I will try to give the reasoning with a short story.

Ramesh was very happy to move into his newly bought villa in a private layout.  It was surrounded by trees, plants and a well maintained Garden.  It had a big patch of lawn in the front which added to the aesthetics of the villa.  Ramesh was very proud.  But his happiness was short lived when he watched people mindlessly walking on the lawn.  So Ramesh had to put a sign board which stated “Walking on the lawn is prohibited”.  But to his disgust, after this people started running on the lawn.  So he had to change the sign board to “Walking and running on the lawn is prohibited”.  Now people started hopping on the lawn.  Which again made him to add “hopping” to the prohibited list.  Next people started jumping on the lawn.  This went on and on and the sign board grew bigger and creasier day by day. Like the people tried to avoid the instructions, tax avoidance is the first reason for the creation of a maze of tax laws.

Taxation laws have an impact on cash flow which makes the tax payers resort to tax planning.  It is a universal truth that people do not want to pay more taxes.  It is human tendency to minimize his tax outflows.  At the same time Governments want to collect more and more by way of taxes to have the luxury of more funds at their disposal and go on bringing amendments in the name of anti avoidance.  This tug of war leaves the statute book fat and cumbersome.  Let us now discuss few areas which makes the law tough.

Taxing of Notional Income

Notional Income is an illusionary income which is never earned.  ‘Foul’ did you scream?  Not in the eyes of law. But that is the reality.  There are many areas under Income Tax Act, 1961 wherein it is not the real income but the notional income which is taxed.  To name a few:

              a. Where you let out a property for less than the market value, you may have to pay tax on the market rent even though it is never earned.  For instance you decide to give a property to your friend at a concessional rate.  In that case you need to pay tax on the prevailing rent for similar property in the vicinity even though it is let out at a lower rate. (Read Taxation of Income from House Property – First Guide to Basics)

              b. In case of small businesses with less than 2 crores of annual turnover, they have two options – One to declare profit equal to 8% of sales irrespective of the possibility that the profit could be much lesser than 8% or Two to go with the other option of maintaining complete books of account, get them audited (cost of an accountant, auditor’s fees to name a few as additional costs) which can substantiate lower profit than 8% of sales.

              c. If an immovable property is sold for lesser price than the circle rates prescribed for stamp duty purposes, stamp duty value will be deemed to be the consideration received for sale of immovable property. This amounts to taxation of artificial income.

Retrospective Amendments

Let us say the Government brings in a new law asking all the citizens who own a four-wheeler to pay a pollution cess and makes it effective five years prior to the date.  How do you think sentiments get affected? The Government resorts to this means to negate the adverse judgement against it by various forums.  According to many experts, India made a blunder when it resorted to this means to negate the judgement in the famous Vodafone case.

Contradictory judgments

Taxation in India has got four levels of Dispute Forums. These add, many times, confusion and additional dimensions to the maze of tax laws.  They are usually:

              a.  Commissioner of Appeals at First Level

              b.  Appellate Tribunal

              c.  High Court

              d.  Supreme Court

Contradictory judgments
Judgments can be contradictory

Many times, decisions by these forums throw different views on the same subject matter at a later stage which makes life tough for taxpayers to take a decision and move ahead. The journey in the maze continues.

For instance, in case a businessman fails to remit the provident fund deducted from employees’ salary within the due date prescribed by Employees Provident Fund Act, it will not be allowed as deduction even though it is remitted at later stage.  This is based on a Karnataka High Court decision.  Now since income tax returns filed all over India get processed at Centralized Processing Centre which is located in Bengaluru, belated remittance of employee portion of provident fund gets disallowed as CPC follows the decision of Karnataka High Court which is a jurisdictional Court.  This is inspite of decisions by other High Courts which allow deduction if it is remitted within the due date for filing of income tax return – which falls much later than the due dates as per Provident Fund Rules.

Structure of tax laws

The income taxes we pay is not just a product of just the Act passed by the parliament. There are many entanglements – Taxation Laws are usually structured as under:

              a.  Act

              b.  Rules

              c.  Forms

              d.  Schedules

              e.  Notifications

              f.   Circulars

              g.  Press Releases

That is quite a handful, even for practicing professionals. These parts possess their own statutory values and needs to be treaded carefully.  For instance, Goods and Service Tax in India, which was supposed to be a very simple tax, is weighed down with innumerable notifications. Notifications are not part of the Act passed by the parliament. These are issued by the bureaucrats running the tax departments. Many times, bureaucracy’s overindulgence defeats the spirit of the law envisioned by the law makers.

We at Daily Economics try to demystify the taxation statutes and educate on varied rigors in a simple and easily understandable manner. This article has tried to give the reader a view of the “tip of the iceberg” of complications under tax laws. We will try to guide you through this maze of tax laws.

Please do give your feedback which will help us to map our journey forward.

The views expressed are based on the statutory provisions as it stands on the date of this article. Readers are advised to take professional help in the tax matters and not to self-venture based on this article.