Budget 2022 was presented by the Union Finance Minister Nirmala Sitharaman on the first day of February. It came not only at a difficult time but also with a trepidation about the likely effect of the policy changes that it might be impregnated with. The budget was placed in the backdrop of a global pandemic, rampant unemployment, economic de-growth, uncertain demand and supply and severe problems in the banking and industrial sectors. Additionally, the upcoming state elections in the five states of Assam, Kerala, Puducherry, Tamil Nadu, and West Bengal had its own political ramifications.
The FM had the onerous task of igniting growth and bringing the economy back on an 8-9% growth trajectory by balancing the numbers minutely. This is very significant as the slowdown of first quarter FY 21 was to some extent being compensated by the better performance of the subsequent two quarters. However, to fast-track growth and to provide a stimulus to the industrial sector and for demand creation, a trigger to change mindsets at the consumer level was also needed. Budget 2021 may achieve both as the industry and the individual taxpayers are expected to be aligned.
At the personal taxation level, the FM made no changes to the income versus tax rate slabs. Popular deductions like 80C, 80D, 80 G remain untouched. There was a general expectation of cutting the tax rates and raising the deduction level under 80C (which is beneficial for the taxpayer opting for the old regime of tax calculation last year). Secondly, the 80D deductions cap was widely expected to be enhanced as the cost of health insurance saw a jump of 50~ 100% during FY 21. While no such benefits came through, the FM has not levied any Covid-19 related cess – which was also anticipated.
Apart from this, no tax return filing will be required for senior citizens aged 75 years or above. The concerned senior citizen has to be an Indian citizen and his personal income should comprise only pension and the interest received in the bank account where the pension money is credited. However, the senior citizen will however have to file a declaration that he does not have any other source of income. The age bar, if lowered to 60 years, would have had higher coverage.
Changes brought in the taxation of ULIP income is definitely going to be a pain area. Till date the taxation pattern, where the sum assured is more than 10 times the annual premium was in the exempt-exempt-exempt (EEE) category, which means the individual gets a tax deduction on investment and also does not need to pay tax on accruals and on the maturity amount. Frame this with the taxation pattern if the investor puts in money in MFs. An investor is required to pay 10% long term capital gain tax (holding period 12 months or above) on withdrawal if the gains are over `1 lakh annually.
In the Budget proposal, the same tax rules have been made applicable on ULIPS issued after February 1, 2021 if the annual premium is `2.5 lakhs or more per annum. Also, the interest earned on EPF, VPF (voluntary provident fund) and exempted PF trusts - where the annual employee contribution is beyond `2.5 lakh per year - will now become taxable. As per the Budget, “Under the existing provisions of the IT Act, there is no cap on the amount of annual premium being paid by any person during the term of the policy. Instances have come to the notice where high net worth individuals are claiming exemption under this clause by investing in ULIPS with a huge premium. Allowing such exemption in policy/policies with huge premium defeats the legislative intent of the policy.”
While this is a conscious move towards bringing in a parity of benefits arising to a taxpayer who is using an ELSS and the other an ULIP route, there lies a lack of clarity about how the taxation would work if an investor switches from an equity to a debt fund during the policy tenure. ULIPs offer such switching between equity and debt variety to the investor.
For providing some relief, two other proposals of the FM need mention. The advance tax liability on dividend income shall arise only after the declaration or payment of dividend and extension of the time period to March 31, 2022 for availing loans to get additional tax deduction up to `1.5 lakh on interest for the first-time home buyers.
To make tax filing more transparent and less tedious, ITR for FY ‘22 will come with more pre-filled information namely capital gains, dividend income and income from interest. However, it is not very clear how the government will arrive at the base price (with or without indexation benefit) of non-financial assets which is one of the determinants of the capital gain.
Earlier, the tax department could reopen assessment against a tax payer for up to six years in case there was a suspicion of tax evasion. This rule has been changed by the FM and the period for such re-opening has been slashed by three years. Also, a Dispute Resolution Committee will be set up for small taxpayers to handle disputes between `10 and 50 lakhs.
-The author works for Peerless Financial Services Ltd. Views expressed are his personal.