Understanding the Tax Changes for the Financial Year 2019-2020

The financial year 2019-2020 marked significant changes in the tax landscape in India, with the Government of India revising various provisions aimed at simplifying and possibly enhancing the tax experience for taxpayers. These changes primarily came into effect from April 2019 and have been significant enough to require careful consideration by all taxpayers.

Choosing Your Tax Regime

Last year's budget introduced taxpayers to two distinct tax regimes to choose from, providing a more tailored approach to taxation. For the second year, taxpayers were required to actively make a choice between these two regimes. The old regime, which comes with a range of exemptions, is contrasted with the new regime that offers lower tax rate slabs but does not provide exemptions. The correct selection of the tax regime can significantly impact the overall tax liability, so it is crucial to understand the differences between the two.

Timeline for Filing Tax Returns

Tax returns traditionally fell due by 31st July every year. However, flexibility was provided by allowing the submission of revised tax returns or late filings until 31st March of the assessment year with the debt of a small late fee. For the financial year 2019-2020, this threshold has been significantly shortened. Taxpayers now have only until 31st December to file their revised returns or late filings, marking a major reduction in the window for corrections and filings.

Dividend Income: Full Taxation

A significant change in the dividend income tax for the financial year 2019-2020 was the transition from partial tax exemption to full taxation. Prior to this year, dividend income from domestic companies up to Rs. 10 lakh was exempt from tax, while the dividend distribution tax was levied on companies. As of FY 2020-21, dividend income is now fully taxable at the slab rate, and companies are no longer required to pay dividend distribution tax. This means you must now reconcile dividend income with TDS (Tax Deducted at Source) details in your Form 26A and pay the applicable tax according to your income tax slab.

Pre-Filled ITR Forms for Convenience

The government has introduced a feature to make the process of filing income tax returns more convenient and transparent. This year, all ITR forms will come pre-filled with essential details such as capital gains from listed securities, income from mutual funds, dividends, interest from banks, and post office, as well as salary income. This simplifies the process for taxpayers and ensures all relevant information is correctly included in the return.

Taxation on Interest Earnings from Provident Funds

The interest on provident fund (EPF) contributions previously enjoyed full tax exemption up to FY 2020-21. However, in 2021, the Finance Minister announced that interest earned on voluntary contributions to EPF exceeding Rs. 2.5 lakhs would be subject to tax. This limit was later increased to Rs. 5 lakhs if the employer does not contribute to EPF. Therefore, taxpayers with EPF/VPF contributions exceeding these limits must now account for and pay tax on the additional interest earned. Effective from April 2021, this change will impact those who have made voluntary contributions exceeding the prescribed limit. It is advised to plan contributions and taxes accordingly to avoid any unexpected tax liabilities.

Tax Implications on ULIPs

Under the previous provisions, the maturity proceeds of a Unit Linked Insurance Plan (ULIP) were exempt from tax if the total premium did not exceed 10% of the sum assured. However, starting from FY 2020-21, this exemption applies only if the premium of all ULIP policies taken in a year does not exceed Rs. 2.5 lakhs. This rule will apply for ULIPs purchased after 1 February 2021. Therefore, taxpayers need to carefully manage their ULIP investments to avoid any tax implications.

Senior Citizen Simplifications

For senior citizens aged 75 or above, the financial year 2019-2020 brought some simplifications. If a senior citizen has only income from pension and interest income from a bank, they are exempt from filing Tax Returns (ITR) provided they meet certain conditions. This change aims to reduce the burden on older taxpayers who typically have simpler financial situations.

In conclusion, the financial year 2019-2020 saw a range of changes in the tax landscape, each with its own implications and benefits. Understanding these changes and making informed decisions can help maximize savings and simplify the tax filing process.