Union Budget 2020: New tax deal for the common man

Finance minister Nirmala Sitharaman on Saturday rolled out a new optional income tax regime that offers lower rates as a trade-off for foregoing exemptions for annual incomes up to Rs 15 lakh. The move was projected as an effort to provide relief and simplicity to taxpayers, particularly those at lower and middle income levels.
The tax structure has been rejigged with the introduction of four thinly-sliced tax slabs between Rs 5 lakh and Rs 15 lakh with the rate applicable to each of them going down — from 20% to 10% between Rs 5 lakh and Rs 7.5 lakh, from 20% to 15% in the Rs 7.5 lakh-Rs 10 lakh bracket, from 30% to 20% for Rs 10 lakh-Rs 12.5 lakh and from 30% to 25% between Rs 12.5 lakh and Rs 15 lakh.In return for the lower taxes, those opting for this new scheme would have to forgo all deductions available under the existing regime.The FM in her speech said this would lead to “substantial tax benefit” and gave the example of a person earning Rs 15 lakh and not using any exemptions now. Such a person, she said, could save Rs 78,000 in tax annually.

This optional scheme, the FM said, is estimated to cost the exchequer Rs 40,000 crore a year in foregone I-T revenues. What the speech did not spell out, but the budget documents did, is that the option to choose the new scheme would be reversible for those who do not have any business income.
The other major change that will impact individual taxpayers is in dividend distribution tax (DDT) currently imposed on companies or funds. Under DDT, companies or mutual funds pay 15% but dividend income up to Rs 10 lakh annually is not added to a person’s taxable income. The Budget has scrapped DDT; dividend income will henceforth form part of an individual’s taxable income. That means it could be taxed at up to 42.7%, the highest rate of tax including surcharges and cesses. The move is seen as a big disincentive for those using investments as tax saving instruments and could explain much of the market’s negative reaction to the Budget.
The FM promised that a “taxpayers charter” clearly enumerating their rights would soon be made part of the statutes. The details of the charter were, however, not spelt out in the Budget speech. The purpose of the charter, according to the FM, is to establish trust between the taxpayer and the tax administration.