5 income tax changes that could be expected in Budget 2021

In last year's Budget, Finance Minister Nirmala Sitharaman introduced a new income tax regime that came into effect from April 1. So some tax experts say that in this year's Budget there might not be many new changes. Under the new simplified income tax regime, there is zero tax for income up to ₹2.5 lakh; 5% for income between ₹2.5 lakh and up to ₹5 lakh; 10% for income between ₹5 lakh and up to ₹7.5 lakh; 15% for income between ₹7.5 lakh and up to ₹10 lakh; 20% for income between ₹10 lakh and up to ₹12.5 lakh; 25% for income between ₹12.5 lakh and up to ₹15 lakh; 30% for income above ₹15 lakh.

These income tax rates are optional and are available to those who are willing to forego some exemptions and some deductions.

"The fact that a new tax regime has been introduced last year means that not many changes can be expected now," HDFC Securities said in a note.

Religare Broking in a note said: "Given that the government is already running a high deficit owing to lower tax collections, we believe any large cuts would be unlikely. However, some relief to certain distressed sectors and tinkering in personal income tax could be on the cards."

Here are five changes to income tax rules that could be announced in Budget 2021:

1) Tax experts expect the government to fix some anomalies in the NPS or National Pension Scheme with regard to income tax benefits.

"For contribution towards Tier I account up to 14% of the employer’s contribution is permitted for central government employees but when it comes to other employees maximum up to 10% of the contribution from employer is eligible for deduction under Section 80CCD(2)," said Balwant Jain, a tax expert.

Under the current income tax laws, if an employer is contributing towards the employee's NPS account, a deduction up to a certain percentage of salary (basic + DA) irrespective of any limit qualifies for income tax deduction under Section 80 CCD(2). For central government employees, it is 14% of salary and for others, the limit is 10%.

2) "From a capital market perspective, key expectations include allow indexation while calculating LTCG on equity shares/equity MFs and/or allow setoff of STT against the tax liability thereon, reduce LTCG period to 1 year for debt MF, exempt dividend income in the hand of recipient to the extent of Rs.2-3 lakhs per annum," HDFC Securities said in a note.

"The reintroduction of long-term capital gains tax in the 2018 budget affected the investors’ confidence. The 10% LTCG tax is an additional tax burden along with other transaction taxes – like STT, stamp duty. Reducing or abolishing LTCG can raise the investors’ confidence," said Harsh Jain, Co-founder and COO, Groww,

3) Currently, long-term capital gains (LTCG) arising out of the sale of listed equity shares and units of equity-oriented mutual fund schemes are now taxed at the rate of 10%, if the LTCG exceed ₹1 lakh in a financial year ( gains up to January 31, 2018 being grandfathered).

Long term capital gains on debt mutual fund units held for more than 36 months are taxed at 20% after adjusting for indexation. Short-term capital gains on units held for 36 months or less are added to the income of the individual and taxed as per the applicable slab rate.

4) Under the current income tax laws, switching of investment in units within the same scheme of a mutual fund from growth option to dividend option (or vice-versa), and from regular plan to direct plan or (or vice-versa) is considered a “transfer” and is therefore liable to capital gains tax, even though the amount invested remains in the mutual fund scheme. However, the switching of investments to/from investment plans to another within the same Unit Linked Insurance Plan (ULIP) of insurance companies is not considered as a “Transfer” and hence, not subjected to any Capital Gains Tax.

The mutual fund industry in its proposals for Budget 2021 has said that "there is need to have uniformity in the tax treatment for “switch” transaction in respect ULIPs and mutual fund products to have a level playing field."

5) In a relief to salaried middle class taxpayers amid the coronavirus pandemic and to boost consumption, the central government may hike the standard deduction limit in Budget 2021, experts said. Standard deduction is a fixed deduction that is allowed to specific income tax assessees, irrespective of expenses incurred or investments made. Introduced in the 2018-19 Budget, the standard deduction replaced the medical and transport allowance. It was further increased to ₹50,000 in the following Budget.

Standard deduction should be hiked from ₹50,000 to ₹1,00,000, Axis Securities said in a note.