Tax Column

Jayesh Dadia 
Chartered Accountant 

Could you explain the new provision in the Income Tax Act regarding reduction in tax rates for individuals and HUF from the current financial year onwards? How is it to be computed and what will be its benefit?

In the Finance Act 2020, a new section, 115 BAC, has been inserted in the Income Tax Act with effect from assessment year 2021-22 (financial year 2020-21) to reduce the tax rates for individuals and HUF if the assessee does not claim certain deductions and tax incentives for availing these new tax rates. The reduced tax rates are 10 per cent (for income between Rs 5 lakhs and Rs 7.5 lakhs), 15 per cent (for income between Rs 7.5 lakhs and Rs 10 lakhs), 20 per cent (for income between Rs 10 lakhs and Rs 12.5 lakhs) and 25 per cent (for income between Rs 12.5 lakhs and Rs 15 lakhs). 

For income above Rs 15 lakhs the tax rate is the same i.e. the existing 30 per cent. Surcharge and cess at specified rate will be chargeable. For claiming benefit of concession in the tax rates, individuals and HUF have to forgo various deductions and exemptions under various provisions of the Income Tax Act. These include deduction under various sections such as 80C (investment in PPF, LIC premium up to Rs 1.5 lakhs), 80D (mediclaim), 80TTA and 80TTB (deduction in interest on bank deposit) and 80G (donations, etc). 

Therefore, before exercising the option to choose the new reduced tax rates you have to compute the tax liability both under the existing tax rates and reduced tax rates and if the reduced tax rates are beneficial to you, only then should you exercise the option of applicability of new reduced tax rates. Considering the conditions prescribed for availing the reduced tax rates where deduction for PPF contribution, LIC under Section 80C, medical insurance under Section 80D, standard deduction from salary under Section 16 and similar other deductions are not to be allowed, concessions in reduced tax rates to individuals and HUF do not appear to be very attractive. 

I am an individual and was an NRI resident up to the financial year 2019-20. In the current financial year, due to the pandemic, I could not travel to the UAE where I am working. If I stay more than 182 days in India, what would be my status under the Income Tax Act for the assessment year 2021- 22? Also, kindly let me know what my status would be if I stay less than 182 days but more than 120 days. Would the income earned by me in the UAE be taxed in India for the current financial year? 

If you stay for more than 182 days in India in the current financial year, then your status will be that of a resident of India for the current financial year. If you are a non-resident in nine out of ten previous years, then your status would be ‘resident but not ordinary resident’. If your status is resident, then your foreign income will be taxed but if your status is resident but not ordinary resident, then your foreign income will not be taxed in India except foreign income related to business or profession carried out outside India by you. 

Moreover, under both the status your Indian income will always be taxed. If you stay less than 182 days but more than 120 days in India and if your Indian income, other than specific foreign income, exceeds Rs 15 lakhs and since you are not liable for taxation on your foreign income in the UAE, you will be considered as resident for the financial year 2020-21. However, for the purpose of calculating the tax liability, you will be treated as resident but not ordinary resident and accordingly your foreign income will not be taxed in India. However, for purpose of taxation, your status will be considered as resident Indian. 

I am an individual earning interest income on deposits in saving account as well as fixed deposits with banks. Is there any exemption from tax while calculating the final tax liability for assessment year 2020-21? 

Yes, there are provisions in the Income Tax Act which provide basic deduction of interest income on saving accounts as well as on fixed deposits. If you are an individual but not a senior citizen and HUF, then under Section 80TTA, you are entitled to a deduction of Rs 10,000 on interest earned on savings. Interest earned on fixed deposits is fully taxable in case of individuals who are not senior citizens. If you are a senior citizen, then interest earned on fixed deposit is tax-free to the extent of Rs 50,000 under Section 80TTB on fixed deposits with bank, cooperative society or the post office. However, a senior citizen will not get any tax benefit in respect of interest earned on saving account balance. Senior citizen means an individual resident in India who is of the age of 60 years or more at any time during the relevant previous year. Therefore, senior citizens being non-residents cannot avail benefit of Rs 50,000.