Budget 2020 will have mixed impact on personal taxation

Taxation of Employee Stock Option Plans (ESOPs) of start-ups: Currently, ESOPs are taxable upon exercise by employees.

Union Budget 2020: “Surya, the Sun, collects vapour from little drops of water. So does the King. They give back copiously. They collect only for people’s wellbeing.” Quoting this verse, the finance minister laid out further tax reforms to stimulate growth, simplify tax structure, bring ease of compliance and reduce litigations.

Residency provisions: An Indian citizen or a person of an Indian origin who visits India during a tax year qualifies to be a non-resident in India if he/she stays in India for less than 182 days during the tax year. To stop the misuse of these provisions by individuals who carry on substantial activities in India but do not pay taxes, it is proposed to amend the said provisions by reducing the number of days stay to 120 days, instead of 182. It is proposed to amend the existing laws to provide that an individual who is a non-resident in India for seven out of 10 preceding tax years will qualify as a not-ordinarily resident in India.

An Indian citizen shall be deemed to be tax resident of India if he/she is not taxable in any other country due to his/her domicile, residence or any other criteria.

New tax regime: Individual taxpayers will have an option to pay taxes at reduced rates. But if they opt for this, they will not be eligible for deductions and exemptions such as house rent allowance, LTC, standard deduction and interest paid on housing loan of a self-occupied property.

Taxation of Employee Stock Option Plans (ESPOs) of start-ups: Currently, ESOPs are taxable upon exercise by employees. It is proposed to defer the point of taxation of ESOPs granted to employees of eligible start-ups from the date of exercise of shares to five years or the sale of shares or ceasing of employment, whichever is earlier.

Taxation of employer contribution to retirement plans: It has been proposed to introduce a combined upper limit for employer’s contribution towards PF, NPS and superannuation fund of Rs 7.5 lakh. Any contribution in excess of this limit along with the accretions on this excess amount will be taxable as a perquisite.

Appeals and penalty: To impart greater efficiency, transparency and accountability to the assessment process under the Income-tax Act, a new e-assessment scheme has already been introduced. Now, new schemes of e-appeal and e-penalty are proposed to be launched in line with the e-assessment scheme.

Taxation of dividends: DDT is proposed to be abolished and dividend will now be taxable in the individual’s hands as per their applicable tax rates.

While an individual taxpayer who opts for or falls under one of the above schemes of taxation will have clear reduction in taxes, there will be no significant impact on the taxability for other individuals.

Written by EY India Partner and Mobility Leader Amarpal Chadha, this article first appeared in The Financial Express on 2 February 2020.