How Union Budget 2021 can benefit your annual tax slabs

Not only was the traditional bahi-khata replaced by tablets in the Union Budget 2021-22, but the traditional measure of changing tax slabs was also replaced by direct tax incentives to ease compliance and promote growth in the COVID-hit economy.

Let’s discuss what’s in it for common man, i.e. the individual taxpayers, and how they could make the most of it. 

Exemption for LTC cash scheme

Leave Travel Concession is a scheme in which employees and their families’ travel cost is reimbursed by the employer. If they have travelled by air, they get reimbursed up to the economy class fare. If they travel by railways, they get reimbursed up to the first-class railway fare or actual expenses, whichever is lower.

But, due to the COVID-19 outbreak, travel was on halt. So, employers gave cash allowances to employees in lieu of LTC. The budget proposed to exempt this cash allowance but with terms and conditions applied. This cash allowance is only exempt if spent on purchasing goods or services whose GST rate is 12 percent or more. This amount has to be spent between October 12, 2020 and March 31, 2021. 

Further, the exemption is limited to one-third of the total expenditure or Rs 36,000, whichever is lower. Since the time frame is up to March 31, 2021, it is applicable for FY2020-21 only.

Relaxation in filing the income tax return

One of the proposals that caught the eye was the non-filing of income tax returns for senior citizens aged 75 years or above. However, this does not mean that they do not have to pay taxes at all. This relaxation is for those senior citizens who only have two sources of income, i.e. pension income and bank interest. 

Furthermore, the bank interest income should be from the same bank in which the pension income is received. The bank will deduct tax after computing the total income of such individuals. So, the task of filing return for such senior citizens has been shifted to banks to save them from additional troubles.

ALSO READ

Budget 2021: No ITR filing for senior citizens aged 75 and over earning only pension and interest

Relaxation in advance tax instalment for dividend income

With the dividend income becoming taxable from last year, there was a possibility that taxpayers would have to pay interest u/s 234C. Section 234C levies interest at the rate of 1 percent for non-payment of advance tax.

For individuals earning huge dividend income, this interest was a problem as advance tax is paid on an estimated income, and one could not predict the receipt of dividend. To address this issue, the budget proposes not to levy such interest on the shortfall of advance tax arising from such dividend income.

Extension of interest deduction on a home loan

Individual taxpayers can avail a deduction of interest on home loans up to Rs 1.5 lakh. One of the conditions for such deduction was that the loan is to be sanctioned from April 1, 2019 to March 31, 2021. This period is extended till March 2022 in this budget. The deduction is exclusively for first-time homebuyers.

Some of the tax amendments may sound negative at first but there is a silver lining. For starters, the interest received on recognised provident funds was earlier exempt for employees. So, employees contributed a large sum to this fund to earn tax-free interest.

This exemption has been withdrawn in this budget if the employee makes a total contribution above Rs 2.5 lakh. Nevertheless, it still means that employees can earn tax-free interest on the contribution of up to Rs 2.5 lakh. 

Another instrument that was used for tax planning is the Unit-Linked Insurance Policy (ULIPs). As per Section 10 of the Income Tax Act, 1961, proceeds from maturity of any insurance policy are exempt. Although ULIPs have both investment and insurance components, its proceeds used to get exempt under this section for individuals paying a premium for the same.

The government has withdrawn such exemption if the yearly premium exceeds Rs 2.5 lakh. The budget memorandum iterates that the intent of Section 10 is to provide small and genuine cases of life insurance rather than to benefit HNIs as a tax-planning tool. This amendment is applicable from February 1, 2021.

These proposals seem to be discouraging for individuals who are in the higher tax bracket but the intention of the government is to increase the spending to revive the economy. So, the fixed amount that an individual used to contribute to RPF or ULIPs will now be employed elsewhere. 

ALSO READ

Budget 2021: No news is good news on taxation, says Cleartax’s Archit Gupta

For YourStory's multimedia coverage of Budget 2021, visit YourStory's Budget 2021 page or budget.yourstory.com.