Important Keyword: Budget 2020, Dividend Income, Income from House Property, Resident Status, Slab Rates.
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Budget 2020: Highlights
The Finance Minister, Nirmala Sitharaman, delivered the Budget 2020 speech on February 1, 2020. Lasting a record-breaking 2 hours and 30 minutes, her address unveiled several significant announcements that shaped the economic landscape. Here are the major highlights of Budget 2020:
New Tax Regime v/s Current Tax Regime
Income Tax Slab Rates
Certainly, here are the income tax slab rates for both the current and new tax regimes as announced by the Finance Minister:
Current Tax Regime:
Income Range (in INR)
Tax Rate
Up to 2,50,000
Nil
2,50,001 – 5,00,000
5%
5,00,001 – 10,00,000
20%
Above 10,00,000
30%
New Tax Regime:
Income Range (in INR)
Tax Rate
Up to 2,50,000
Nil
2,50,001 – 5,00,000
5%
5,00,001 – 7,50,000
10%
7,50,001 – 10,00,000
15%
10,00,001 – 12,50,000
20%
12,50,001 – 15,00,000
25%
Above 15,00,000
30%
Under the new tax regime, taxpayers have the option to forgo exemptions and deductions in exchange for lower tax rates. It provides a simplified tax structure with reduced rates and aims to promote ease of compliance for individual taxpayers. However, taxpayers are advised to evaluate their individual financial situations and consult with tax experts before opting for either tax regime to make an informed decision.
Changes in Deductions and Exemptions
Certainly, here’s a breakdown of the major removals of tax exemptions and deductions announced in Budget 2020, along with the deductions that have remained:
Changes under Income from House Property
Here are the changes in deductions related to home loan interest, as per the new income tax regime:
No claim of home loan Interest on Self-Occupied House Property: Taxpayers who have taken a home loan for their self-occupied property and are paying interest on it cannot claim the interest deduction under Section 24(b).
Claim of home loan Interest on Rental House Property: Under the new income tax regime, individuals can only claim interest on home loans for let-out properties up to the amount of their rental income.
Setting off losses from house property: In the new income tax regime, losses from house property can only be set off against other income from house property. Furthermore, losses from income from house property cannot be carried forward.
Deduction for First-time Homebuyers: Deductions under Section 80EE and Section 80EEA, which provided relief on interest paid on home loans for first-time homebuyers, are no longer available for taxpayers following the new income tax regime.
Other Important Highlights of the Budget 2020
Dividend Distribution Tax (DDT)
The landscape of dividend taxation underwent a significant shift with the abolition of Dividend Distribution Tax (DDT) for companies. Under the new regime, dividends are now directly taxable for shareholders at a rate of 15%.
Corporate Tax:
In the realm of corporate tax, notable changes have been introduced:
Tax on Co-operative Societies: The tax rate for co-operative societies has been reduced from 25% to 22% without exemptions. This move aims to provide relief to co-operative societies and enhance their competitiveness in the market.
Tax for Manufacturing Startups: Manufacturing startups registered after 1 October 2019 will benefit from a reduced tax rate of 15%. This incentive is contingent upon them commencing operations by 31 March 2023. The measure seeks to encourage the growth of manufacturing startups and promote industrial development.
Foreign Portfolio Investment (FPI)
In the domain of Foreign Portfolio Investment (FPI), specific adjustments have been made:
Expansion of Corporate Bond Limit: The limit for Foreign Portfolio Investment (FPI) in corporate bonds has been raised from 9% to 15%. This adjustment aims to attract greater foreign investment in corporate bonds, thereby bolstering liquidity in the market and facilitating capital inflows into the corporate sector.
Residential Status
In the Budget 2020, significant changes were made to the conditions governing residential status for tax purposes. The amendment reduced the threshold for the number of days an individual must spend in India during the previous financial year to qualify as a resident.
Previously, an individual was considered a resident for tax purposes if they were present in India for 182 days or more during the previous financial year. However, with the amendment introduced in Budget 2020, this threshold was reduced to 120 days.
Important Keyword: Capital Gains, Income from Business & Profession, Income from House Property, Income from Other Sources, Salary Income.
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What are the 5 Heads of Income?
In the quest to enhance earnings and foster financial growth, individuals and businesses explore various avenues such as employment income, interest from savings or investments, profits from sales, and revenue from diverse sources like equity trading, cryptocurrency, and more. However, the complexity of managing multiple income streams often poses challenges during tax filing. To simplify this process, the income tax department has devised five primary categories, or heads, under which all types of income can be classified.
Heads of Income
To ensure seamless tax filing and compliance with regulatory requirements, the income tax department has delineated five distinct heads under which taxpayers must categorize their earnings accurately. This meticulous allocation helps prevent potential issues and ensures smooth ITR filing.
Here are the five heads of income:
Income from Salary
Income from House Property
Income from Capital Gains
Income from Business and Profession
Income from Other Sources
Income from Salary:
This head encompasses various forms of remuneration received by an individual as part of their employment, including salaries, wages, allowances, bonuses, commissions, and pensions. It also covers advance salary, gratuity, and arrears received post-employment. It’s crucial for these earnings to arise from an employer-employee relationship to be classified under this head. Additionally, certain exemptions like standard deduction, house rent allowance (HRA), and conveyance allowance are available under this category.
Income from House Property:
Under this head, individuals must declare rental income earned from properties they’ve leased out, such as rental income from land or property. Taxpayers can claim deductions for interest paid on home loans for both self-occupied and rented properties. However, if an individual owns multiple properties, only one can be considered self-occupied, while the others are deemed let out.
Income from Capital Gains:
This category encompasses profits or losses incurred from the sale of capital assets, including investments like land, buildings, shares, jewelry, bonds, and mutual funds. It’s divided into short-term and long-term capital gains based on the duration of asset ownership. Short-term gains arise from assets held for a short period, typically up to 12 months, while long-term gains stem from assets held for longer durations.
Income from Business and Profession
This category encapsulates the profits or losses derived from engaging in any business or profession. Business activities encompass various endeavors such as trade, commerce, manufacturing, and similar ventures. On the other hand, a profession refers to a specialized field where individuals have acquired expertise through formal education and examination.
Within this head, there are three distinct sub-categories for business income:
Speculative Business Income: This pertains to income generated from speculative transactions where there’s no actual delivery of assets involved.
Non-Speculative Business Income: This category covers income earned from regular business activities, including trade, manufacturing, or any professional services rendered.
Specified Business Income: Certain specific types of business income fall under this category, often subject to specialized regulations or provisions.
Moreover, taxpayers have the option to opt for the presumptive taxation scheme, allowing them to declare profits at reduced rates and pay taxes accordingly based on this declaration.
Income from Other Sources:
Any income not categorized under the above heads is reported under income from other sources. This includes earnings like interest from savings accounts or deposits, dividends from shares or mutual funds, proceeds from lotteries or games, and gifts received, among others.
Important Keyword: Business and Profession Income, Capital Gains, Income from House Property, Income Source.
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Set Off and Carry Forward Losses
Setting off and carrying forward losses is a vital strategy for individuals and businesses alike when they encounter financial setbacks. This approach allows them to utilize these losses to diminish their tax obligations, thereby turning adversity into opportunity. By leveraging this strategy, taxpayers can navigate challenging financial circumstances more effectively, making it a crucial aspect of income tax planning.
Basics of Carry forward and Set off of losses
Taxpayers have the flexibility to offset losses against their income for the current year. If any losses remain unutilized, they can carry them forward to subsequent years to offset against future income. It’s worth noting that if taxpayers fail to file their Income Tax Return (ITR) within the stipulated deadline under Section 139(1), they forfeit the opportunity to carry forward losses to future years, except for losses under the head “Income from House Property.” However, even if they file a belated ITR, they can still carry forward losses under this category to future years.
Set Off Losses
Intra-Head Set Off of Loss:
Intra-head set-off entails offsetting losses against income within the same category. This means losses from a specific source within a particular category can be adjusted against income from another source within that same category. For instance, if there’s a loss from a self-occupied property but profit from another rented house property, you can use the losses to offset the income from the profitable property.
Inter-Head Set Off of Loss:
Inter-head set-off involves adjusting losses from one income category against profits from another income category. Therefore, if a taxpayer incurs losses in one income category but earns positive income in another, those losses can be offset against the income. For example, you could set off losses from a self-occupied house property against income from salary. However, before applying inter-head set-off, the taxpayer must first utilize intra-head set-off.
Methodology of set-off of losses for each head
Business (PGBP) Loss:
Non-Speculative Business Loss: Can be set off against any income except salary income.
Speculative Business Loss: Can be adjusted against only Speculative Business Profit.
Loss under Capital Gains:
Short-term capital loss: Can be adjusted against short-term and long-term capital gains.
Long-term capital losses: Can be adjusted against long-term capital gains only.
Capital gains losses can only be set off against capital gains and not with any other income.
House Property Loss:
Loss from house property: Can be set off against any other income.
Set off of losses can be done up to INR 2,00,000 for a particular assessment year.
Loss from trading in Cryptocurrency and other Virtual Digital Assets (VDA):
Losses from the transfer of cryptocurrency, NFT, or VDA: Cannot be set off against any other income.
Losses from other heads can be set off against profit on the transfer of cryptocurrency, NFT, or VDA.
Horse-Race Loss:
Losses from the business of owning and maintaining racehorses: Cannot be set off against any income other than income from the business of owning and maintaining racehorses.
Specified Business Loss:
Losses from businesses specified under section 35AD: Can be adjusted against income from specified businesses only.
Losses from other businesses and professions can be set off against specified business losses.
Loss from Gambling or betting:
Losses from winnings from lotteries, crossword puzzles, horse races, card games, and games having gambling or betting: Cannot be set off against any income.
Example of Set-Off Loss:
Non-Speculative Business Loss: INR 5,00,000 Speculative Business Income: INR 1,00,000 House Property Income: INR 2,50,000
Solution:
Taxpayers can set off Non-Speculative Business Loss in the following order:
Speculative Business Income (Intra-head set off): INR 1,00,000
House Property Income (Inter-head set off): INR 2,50,000
Carry Forward Loss to future years: INR 1,50,000 (5,00,000 – 1,00,000 – 2,50,000)
Carry Forward Losses
Loss remaining after set-off refers to the portion of the loss that taxpayers can carry forward to future years to offset against future incomes. For instance, if there is a loss from self-occupied house property remaining after intra-head and inter-head set-off, the taxpayer can carry it forward for up to 8 years and adjust it against future income from house property.
To carry forward the loss to future years, taxpayers must file the Original Income Tax Return (ITR) within the due date as per Section 139(1). However, even if taxpayers file a Belated ITR under Section 139(4), they can still carry forward loss under the head House Property to future years. Below is a table outlining the rules for carrying forward and setting off losses against future incomes:
Example for Carry Forward of Loss:
FY 2021-22 (AY 2022-23)
Non-Speculative Business Loss: INR 5,00,000
Speculative Business Income: INR 1,00,000
House Property Income: INR 2,50,000
FY 2022-23 (AY 2023-24)
Speculative Business Income: INR 30,000
Non-Speculative Business Income: INR 1,40,000
Solution:
FY 2021-22 (AY 2022-23)
The taxpayer can set off Non-Speculative Business Loss in the following order:
Speculative Business Income (Intra-head set off) – INR 1,00,000
House Property Income (Inter-head set off) – INR 2,50,000
Carry Forward Loss to future years – INR 1,50,000 (5,00,000 – 1,00,000 – 2,50,000)
FY 2022-23 (AY 2023-24)
The taxpayer can set off Non-Speculative Business Loss in the following order:
Carry Forward Loss – INR 1,50,000
Non-Speculative Business Income – INR 1,40,000
Speculative Business Income – INR 10,000
Carry Forward and Set Off Business Loss
Non-speculative business loss:
Taxpayers can carry forward Non-Speculative Business Loss remaining after set off for up to 8 assessment years. These losses can be set off against incomes under the head ‘Profits and Gains from Business and Profession.’
Speculative business loss:
Losses from speculative business can be carried forward for 4 years. However, these brought-forward losses can only be adjusted against speculative business incomes.
Specified business loss:
There is no time restriction for carrying forward losses from specified business. These brought-forward losses can be adjusted against specified business incomes only.
Owing and maintaining racehorses
The taxpayer can carry forward losses from owning and maintaining racehorses for up to 4 years. However, they can only adjust these losses against the profits earned specifically from owning and maintaining the racehorses.
Carry Forward and Set Off of House Property Loss
The taxpayer has the option to carry forward and set off losses from House Property for a duration of 8 assessment years. Moreover, this carry forward of losses is permissible even if the Income Tax Return (ITR) is filed after the due date specified under section 139(1).
In the subsequent financial years, these carried forward House Property Losses can be set off against any income generated from House Property.
Carry Forward and Set Off of Capital Loss
The taxpayer has the provision to carry forward losses under the head of ‘Capital Gains’ for up to 8 assessment years, provided that they have filed their Income Tax Return (ITR) before the due date as specified under section 139(1).
In the subsequent financial years, the taxpayer can utilize the carried forward Short Term Capital Loss (STCL) to offset both Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG). However, the carried forward Long Term Capital Loss (LTCL) can only be set off against Long Term Capital Gains (LTCG).
Carry Forward and Set Off of Crypto Loss
As per the amendments introduced in Budget 2022, significant changes have been made to the taxation of cryptocurrency, NFTs, and other virtual digital assets (VDA). One notable change is regarding the treatment of losses incurred from the transfer of these assets.
Under the new provisions, taxpayers are no longer permitted to offset losses from the transfer of one virtual digital asset against profits from the transfer of another VDA or any other form of income. Additionally, the option to carry forward such losses to subsequent years for set-off against future income has been eliminated.
Furthermore, if a taxpayer experiences a loss under any other income head, they are prohibited from using it to offset profits generated from the transfer of virtual digital assets. These changes represent a significant shift in the tax treatment of cryptocurrency and other similar assets, highlighting the evolving regulatory landscape in this space.
Treatment of Loss as per New Tax Regime
With the implementation of Section 115BAC in Budget 2020, several changes were introduced in the treatment of losses under the income tax regime. Here’s a breakdown of the key modifications:
House Property Loss: Under the new tax regime, taxpayers can only set off the current year’s loss from house property against income derived from house property itself. Importantly, they are prohibited from offsetting house property losses against any other form of income. Moreover, if taxpayers opt for the new tax regime, they cannot carry forward house property losses to subsequent years.
Set Off Business and Profession Loss: In the scenario of business income, individuals or Hindu Undivided Families (HUFs) are restricted from setting off brought forward business losses or unabsorbed depreciation. Furthermore, they cannot carry forward these losses or unabsorbed depreciation if they are associated with deductions or exemptions withdrawn under clause (i) of sub-section (2) of section 115BAC.
In essence, under the new tax regime, taxpayers can carry forward short-term and long-term capital losses, as well as derivatives trading losses. However, losses such as house property losses and additional depreciation, which are invalidated under Section 115BAC(2)(i), cannot be set off or carried forward.
This distinction between the treatment of losses in the new and old tax regimes is illustrated in the accompanying image, providing a clearer understanding of the changes introduced.
Important keyword: Income from House Property, Income Heads, Section 80EE.
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Income from Let out House Property
Owning a home has long been a cherished aspiration for the Indian middle class. As homeownership becomes a reality for many, it’s crucial to grasp the tax implications associated with different types of House Property Income. Under the Income Tax Act, House Property Income falls into three main categories:
Self-occupied House / Permanent Residency: This category includes properties that are used as the primary residence of the owner. If you live in the property you own, it falls under this classification. The tax treatment for self-occupied houses differs from that of rented properties.
Let out House / Rented Property: Properties that are rented out to tenants fall into this category. Any income generated from renting out such properties is considered Let Out House Property Income. The rental income earned is taxable under the head “Income from House Property.”
Deemed Let out House Property/ Vacant House: Properties that are neither self-occupied nor rented out are classified as Deemed Let Out House Property or Vacant Houses. Even if these properties remain unoccupied, they are deemed to be let out for tax purposes. This means that not deriving any income from a property does not exempt it from taxation.
How to Calculate Let Out House Property Income?
Rental Income: This refers to the total rent received by the property owner during the financial year.
Municipal Taxes: If you’ve paid any Municipal Taxes for your property, you can claim a deduction for the same under Section 23 of the Income Tax Act.
Standard Deduction: Homeowners incur various expenses for maintaining and preserving their property. However, these expenses cannot be directly deducted from rental income. To address this, homeowners can avail of a 30% standard deduction on the Net Annual Value under Section 23.
Home Loan Interest Payment: Interest paid on a home loan is considered an allowable expenditure when calculating income from house property. For self-occupied properties, a deduction of up to Rs. 2,00,000 is permitted. However, the deduction is limited to the amount of rent received if the property is let out. Also, any loss exceeding Rs. 2,00,000 cannot be set off against other incomes.
Home Loan Principal Repayment as Deduction: Under Section 80C of the Income Tax Act, individuals can claim a deduction for home loan principal repayment of up to Rs. 1,50,000.
Additional Deduction u/s 80EE: First-time home buyers can avail of an additional deduction of Rs. 50,000 under Section 80EE. This is in addition to the deductions available under Section 24(b) and Section 80C.
Benefit of Co-ownership of Property
Absolutely, joint ownership of a property, known as co-ownership, offers tax advantages for all co-owners. When multiple individuals own a property together, the income generated from that property is taxable in the hands of each co-owner according to their ownership share. This means that the tax burden is distributed among the co-owners based on their respective ownership percentages.
Co-ownership not only allows individuals to share the financial responsibilities and benefits of owning a property but also provides an opportunity to optimize tax liabilities. By spreading the tax liability across multiple individuals, co-ownership can result in significant tax savings for each co-owner. This makes it a favorable option for many people looking to invest in property while also managing their tax obligations efficiently.
Income Tax Deductions for Joint Owners
When it comes to co-ownership and co-borrowing of a home loan, the tax implications vary depending on the roles of each individual involved:
Co-owners and Co-borrowers:
If co-owners of a self-occupied property are also co-borrowers of a home loan, each co-owner can claim a deduction on the interest paid on the loan, up to Rs. 2 lakh each.
Additionally, they can claim deductions on principal repayments, stamp duty, and registration charges under Section 80C, with an overall limit of Rs. 1.5 lakh. The deduction amount for each benefit is determined based on the share of ownership in the property.
Co-borrowers without Co-ownership:
If an individual is a co-borrower of a home loan but not a co-owner of the property, they cannot claim deductions on the interest paid on the home loan.
Furthermore, they are not eligible for any benefits related to principal repayment, stamp duty, etc.
Co-owners without Co-borrowing:
If an individual is only a co-owner of a property and not a co-borrower of the loan, they cannot claim deductions on the interest paid on the home loan.
However, each co-owner can claim deductions on stamp duty and registration charges under Section 80C, with an overall limit of Rs. 1.5 lakh. The deduction amount is divided based on the respective ownership shares in the property.
In summary, the tax benefits available to co-owners and co-borrowers are contingent upon their roles in the ownership and financing of the property, with each scenario offering different deduction opportunities under the Income Tax Act.
Important keyword: Income from House Property, Income Heads.
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Income from Deemed Let-Out House Property
Under the Income Tax Act, if an assesses owns more than one house property, they have the option to declare two of them as self-occupied for tax purposes. However, any additional properties beyond these two must be compulsorily declared as rented out, even if they are not actually rented. These additional properties are treated as deemed let out properties, also known as vacant properties.
For deemed let-out properties, the assesses is required to calculate the rental income based on the fair market value of the property. This rental income is then subject to taxation as per the applicable slab rates. It’s essential to note that even if the property is vacant and not generating any actual rental income, the assesses is still liable to pay tax on the deemed rental income from these properties.
For deemed let-out properties, the calculation of income follows a similar process as for properties that are actually let out. However, there is a difference in the deduction available under section 24(b) of the Income Tax Act.
Under section 24(b), the deduction for interest on home loan is limited to Rs. 2 lakhs for deemed let-out properties, which is the same as for self-occupied properties. This means that even if the property is deemed let-out and not actually generating rental income, the owner can still claim a deduction of up to Rs. 2 lakhs for interest paid on a home loan.
What is the difference between Self Occupied & Let Out?
Self-Occupied
Let Out
A Self Occupied House Property is the one that you use as your own residence, your spouse, children and/or parents.
Let Out is when you give a house property for rent for during the financial year either for the whole or a part of the year.
Starting from the Assessment Year (AY) 2020-21, taxpayers in India have the option to declare up to two house properties as self-occupied for the purpose of income tax calculation. This means that if an individual owns more than two properties, they must consider the remaining properties as deemed let-out properties, even if they are not actually rented out.
For example, if an individual owns three properties:
They can declare two of these properties as self-occupied.
The third property will be considered as a deemed let-out property, even if it is not generating any rental income.
This provision allows individuals to optimize their tax liabilities by treating certain properties as self-occupied, thereby maximizing the available deductions and minimizing the tax burden.
How to Determine Taxable Income from Deemed Let Out House Property?
Income from a Deemed Let Out Property is calculated through a series of steps to determine the Gross Annual Value (GAV), Net Annual Value (NAV), and allowable deductions:
Calculate Gross Annual Value (GAV):
GAV of a Deemed Let Out Property is determined based on the least of the following factors:
Fair Rent Value (FRV), which is assessed using the Annual Rent Value of similar properties in the locality.
Assessed Value, determined according to the Municipal Tax Value of the property.
Standard Rent, established as per Rent Act regulations.
Deduct Municipal Taxes Paid:
Municipal taxes, also known as property taxes, are deductible from the GAV. The full amount of municipal taxes paid is allowed as a deduction, effectively reducing the Net Annual Value of the property. However, this deduction is only permitted if the taxes are paid by the property owner.
Calculate Net Annual Value (NAV):
NAV is derived by subtracting the municipal taxes paid from the Gross Annual Value (GAV). This computation results in the Net Annual Value of the Deemed Let Out Property.
Claim Standard Deduction of 30%:
A standard deduction of 30% is applied to the NAV. This deduction represents expenses related to the maintenance and upkeep of the property.
Deduct Interest Paid on Home Loan u/s 24(b):
Interest paid on a home loan, as per Section 24(b) of the Income Tax Act, can be deducted from the NAV. This deduction provides relief for the interest expense incurred by the property owner.
Particulars
Self Occupied
Let Out
Deemed Let Out
Gross Annual Value (Generally, total rent received)
NIL
XXX
XXX
Less: Municipal Taxes Paid
Not Applicable
XX
XX
Net Annual Value
NIL
XXX
XXX
Less: Deduction u/s 24 1. Standard Deduction at 30% 2. Interest on Housing Loan
