By Shahid Khan, Firm: Kochhar & Co
This article highlights the key points to note for employers and employees in India in the Finance Bill presented on 1 February 2020.
1. Income tax rates
The existing tax brackets (known as ‘slab rates’) have not been changed for Individuals and Hindu Undivided Families (HUFs). However, a new special optional tax regime of lower slab rates is being introduced for this category of taxpayers who have incomes up to INR 15,00,000 Those taxpayers who opt for the lower tax rates will have to forego various deductions and exemptions otherwise available to them under the existing slab rates. A comparative chart of slabs and tax rates is provided below.
In addition to the above, Individuals and HUFs with incomes of INR 50,00,000 and above, will also have to pay surcharge calculated at the following rates as a percentage of the amount of income tax.Surcharge
A Health and Education Cess (levy) of 4% is also applied to the amount of income tax and surcharge as calculated above
Conditions when taking advantage of new optional lower tax ratesA Health and Education Cess (levy) of 4% is also applied to the amount of income tax and surcharge as calculated above.
Taxpayers with salary income who opt for the new tax regime of lower rates will not be eligible for the following deductions:
- Standard deduction.
- Any Professional tax.
- Conveyance Allowance, Transport/ Travel Allowance, Daily Allowance, and Entertainment allowance.
- House rent allowance.
- Leave travel concession.
- Any special allowance to meet personal expenses.
- Interest on housing loans.
- Loss under the head income from house property.
- Any deduction in respect of investments in saving instruments and insurance policies, medical expenses, interest on education loans, and donations to charities etc. However, a deduction reflecting an employer’s contribution of up to INR 750,000 in a notified pension scheme would be allowed.
Employees would need to analyse the tax impact under both schemes and opt for the tax scheme which is more beneficial for them.
2. Employer’s contribution to pension funds
It is proposed that employer’s contribution to National Pension Scheme (NPS), superannuation fund and recognised provident fund etc. exceeding INR 750,000 in aggregate will be taxable for the employee as income from salary. Further, annual accretion to the pension account of the employee by way of interest, dividend etc. will also be taxable as income for the employee to the extent it relates to employer’s contribution in excess of INR 750,000.
3. Employee Stock Option Plans for employees of start ups
Currently Employee Stock Option Plans (ESOPs) are taxed as perquisites (benefits). The employer is liable to deduct tax on them from the salary income of the employee at the time of vesting of the shares. In addition, any gain arising on subsequent sale of the shares so acquired is liable to capital gains at the time of sale.
In order to ease the problem of cash flow for payment of taxes by employees of eligible start-ups and tax deducted at source (TDS) by the start-up employers, it is proposed that for eligible start-ups, the employer may deduct tax on perquisite value of ESOPs within fourteen days:
- after expiry of 48 months from the end of the assessment year; or
- of sale of the securities by the employee; or
- of the employee ceasing to be employee of the concerned start-up
whichever is earliest.
This tax will be deducted at the rates in force in the financial year in which the securities were allotted or transferred.
Any capital gain arising on sale of these securities will continue to be taxed as at present. Tax on this will be the employee’s liability.
The Government hopes that the deferment of tax payment on ESOPs will boost the start-up ecosystem, including retention of talent by start-ups.
4. Taxation of Dividend income
The Finance Bill proposes abolishing Dividend Distribution Tax (DDT) currently payable by Indian companies on the dividends declared by them. Accordingly, dividend income arising to the shareholders will now be taxable in their hands at the slab rates applicable to them. The company will however be required to deduct tax at 10% from the dividend on behalf of the shareholders.