Five changes in income tax rules from 1st April

Budget 2021 was announced in Feb 2021 by the Finance Minister. Some of the budget announcements have been made applicable from the start of FY 2021-22. We will discuss some changes relevant to individual taxpayers.

Option to choose between two tax regimes

The taxpayers will have an option to choose between the ‘Old/existing regime’ and the ‘New tax regime’ introduced in Budget 2020. The new tax regime allows the taxpayer to pay taxes at a concessional tax rate by forgoing all the significant deductions and exemptions. In the old tax regime, the tax rates will be higher comparatively; however, the taxpayer will claim all the deductions and exemptions as applicable. 

Starting from 1st April 2021, taxpayers will have to choose whether to continue in the old tax regime or migrate into a new tax regime. Salaried individuals are given the benefit of choosing between the old tax and new tax regime at the start of every year. However, self-employed will have a once in a lifetime option to choose between the regimes.

Also, salaried individuals will have the liberty to file the ITR using another option instead of the option selected at the starting of the year for TDS deduction. For example, an employee choosing to get the TDS deducted based on the new tax regime can change to the old tax regime while filing ITR every year. However, self-employed will be allowed to go back to the old regime only once after the new tax regime. Hence, self-employed people will have to consider all the long-term implications before making a choice.

Dividend income to be reported in ITR for FY 2020-21

Budget 2020 shifted the dividend’s taxability from the hands of the company to the hands of taxpayers. The dividend declaring company used to deduct ‘dividend distribution tax’ on the distributed dividend, and the same was exempt in the hands of the investor. However, since 1st April 2020, if a taxpayer has received any dividend from Indian companies or mutual funds, they will be liable to pay the tax on such dividend income. The corporates and mutual fund houses deduct TDS if the amount of dividend income exceeds Rs 5,000. The taxpayer should meticulously verify the TDS amount reflecting in Form 26AS and disclose the correct amount by grossing up the amount of dividend with the TDS deducted.

Removal of exemption for a voluntary contribution of Employee Provident Fund

Till FY 2020-21, interest income on PF account was exempted even for the own contributions made beyond the mandatory limit of 12% of basic salary. Budget 2021 introduced taxation on the interest on EPF account with annual contribution above Rs. 2.50 lakh starting from 1st April 2021. However, the threshold limit for taxability increases to Rs.5 lakh if the employer does not contribute to the provident fund account.

Due date of belated and revised return changed.

Tax filers are allowed to rectify the error, if any, in the original return by filing a revised return. Also, in case filing of the original return was missed out due to any reason, individuals can file a belated return. Previously the due date for filing both the revised return and the belated return was the last day of the assessment year, i.e. 31st March. However, Budget 2021 has reduced the time limit of filing belated or revised return by three months, i.e. 31st December of the assessment year. So it is advisable to file ITR as early as possible so that there is sufficient time in hand to revise the same if the need be. 

Changes in taxability of ULIP since 1st February 2021 

Till the announcement of Budget 2021, all the maturity proceeds of ULIP (Unit Linked Investment Plan) was tax-free, provided the premium paid did not exceed 10% of the sum assured. Budget 2021 proposed withdrawing this exemption if the annual premiums of all the ULIP policies availed by the individual in the aggregate exceed Rs. 2.50 lakh.

The ULIP policies bought after 1st February 2021 will be covered under the new provision. Hence the individuals will have to keep the new taxability provision in mind while buying new ULIP policies. The gains realised on the ULIP policy shall also attract a flat 10% tax applicable to LTCG; this is done to bring tax parity between the ULIPs and mutual funds. However, the concessional rate of 10% will apply only for those ULIPs which comply with the minimum percentage of investments in equity of Indian companies. 

For any clarifications/feedback on the topic, please contact the writer at jyoti.arora@cleartax.in