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Taxation and the union budget. All you need to know

Taxation and the union budget. All you need to know

On the 1st of February 2021, the Finance Minister Ms. Nirmala Sitharaman presented the Union Budget 2021. This was one of the most anticipated budgets in recent times, with many keen to understand how the government plans to repair, restore and rebuild India’s finances. This budget was presented amidst the gloom of the Covid-19 pandemic and a sinking GDP. This article will examine some of the major announcements made in this budget and how these changes will impact different stakeholders.

The Union Budget and taxes

#1 Relief for Seniors Above the Age of 75

After almost 75 years of independence, the government has finally taken steps to reduce the compliance burden on seniors above the age of 75. Seniors living off pensions or interest income will get a complete waiver of taxes and will no longer need to file income taxes. The bank making the payment will automatically deduct the tax on their behalf.

#2 Boost to Affordable Housing

Finance minister Nirmala Sitharaman during her budget speech announced the extension of the tax holiday on affordable housing projects for one more year. Affordable housing projects can avail of tax exemption benefits until March 31, 2021. In order to increase the supply of affordable houses, she also announced an extension of the eligibility period for claiming tax holidays for affordable housing projects by one more year to 31st March 2022.

#3 Budget and Taxes for Start-ups

Budget 2021 has extended by one more year the tax holiday for start-ups, providing a much-needed post-pandemic boost to the upstarts. In order to incentivize funding of start-ups, the minister proposed extending the Capital Gains exemption for investment in start-ups by one more year till 31st March, 2022. The government also proposed to incentivize the incorporation of one-person companies, a move that will benefit start-ups and innovators.

The paid-up capital of small firms has also been increased from ₹ 50,00,000 to ₹ 2,50,00,000.

Additional Read: Key Things to Know about the Union Budget 2021

#4 Hike in Tax Audit Limit for Digital Transactions

In order to boost digital transactions, the FM in Budget 2021 proposed to raise the limit for tax audits from Rs 5 crore to Rs 10 crore. This step aims to incentivize digital transactions and reduce the compliance burden.

#5 Increased Incentives for FDI

To attract foreign investment into the infrastructure sector, the Budget proposes to relax certain conditions relating to prohibition on private funding, restriction on commercial activities, and direct investment in infrastructure.  In order to allow funding of infrastructure by issuing zero-coupon bonds, the Budget proposes to make notified infrastructure debt funds eligible to raise funds by issuing tax-efficient zero-coupon bonds.

#6 Tax Benefits to IFSC

In order to promote the International Financial Services Centre (IFSC) in GIFT City, the Budget proposes more tax incentives which include a tax holiday on Capital gains. To facilitate the onshoring of offshore funds into India, the finance minister announced new tax incentives for units under the International Financial Services Centre (IFSC). This will allow international funds to relocate to India and avail tax exemptions. This Budget announcement will help scale up IFSC immediately.

#7 Faceless Income Tax Appellate Tribunal

One of the key highlights of Budget 2021 is the introduction of the ‘National Faceless Income Tax Appellate Tribunal Centre’, which replaces the existing Income Tax Appellate Tribunal. The all-new National Faceless Income Appellate Tribunal Centre will incorporate communication between the Tribunal and the appellant through electronic mediums.

#8 Tax on ULIP Maturity Proceeds

Before the Budget, ULIPs were EEE (Exempt-Exempt-Exempt) instruments, with one of the exemptions being that on maturity proceeds. Now, this benefit is only applicable to investors with annual or aggregate premiums not exceeding Rs 2.5 Lakhs. Investments beyond this limit will be subject to the Long Term Capital Gains Tax, similar to equity-oriented investments. Plus, there is a Security Transaction Tax (STT) proposal on the sale, surrender, or redemption of ULIP units.

Additional Read: How Can Wealth Management Help You Save on Tax?

#9 EPF now taxable for high-income earners

This affects only a small part of the population, as for the majority of employees, exemptions are still in place. The proposal is to tax the interest on EPF (Employee Provident Fund) employee contributions over Rs.2.5 Lakhs a year. Less than 1% of EPFO subscribers fall in this bracket, and hence the decision hasn’t had much bearing upon public opinion.

Final Thoughts

The stock markets reacted positively to the key promise of a ‘never before’ like budget. The budget also made way for a few “firsts”; namely the first digital budget. How the key points have an impact on the ground is yet to be seen, especially with the growing fiscal deficit. On the face of it, the Budget 2021-21 does appear to be quite constructive.

Furthermore, if you wish to make most of your investment options, while having a tax-efficient portfolio, choose Tata Capital Wealth. Get in touch today.

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