The Income Tax Act, 1961 is the regulation that oversees imposition, administration, collection, and recovery of taxes levied on income generated in India. In its 298 sections and 14 schedules, this income tax charging statute states various responsibilities and provisions of taxpayers.

In 2010, the GOI sought to replace this Act with the “Direct Taxes Code”, which was eventually scrapped. However, since the time it came into force on 1st April 1962, the Government of India has made several amendments to this Act.

Application of the Income Tax Act

The act is implemented throughout India via the following –

  • Income Tax Rules, 1962

To administer and enforce direct taxes in India, the Central Board of Direct Taxes (CBDT) has put forth a set of rules. These rules are stated in the Income Tax Rules, 1962.

  • Finance Act 

The Ministry of Finance presents a Finance Bill in the Parliament every year, usually in the last week of February. This bill contains several amendments to the prevalent direct and indirect tax regulations in the country.

Both Lok Sabha and Rajya Sabha may recommend amendments and changes to this bill before passing it. After it is passed in the Parliament, the bill will have to undertake the President’s assent, after which, it becomes the Finance Act.

  • Judicial announcements

The Supreme Court holds the right to address contradictions and make decisions for the correct implementation of the income tax rules and laws. Mandates by this court will be applicable throughout the country.

  • Government notifications and circulars

Notifications and circulars issued by the government and CBDT clear confusions and provide more transparency to the taxpayers and authorities regarding an income tax bare act and amendments.

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Overview of the Finance Act 2020 

There were several tax-related changes that were put forth in India’s Finance Bill 2020, which was later declared as the Finance Act 2020, before the Parliament adjourned in March 2020.

Following are a few highlights of the Act, pertaining to income tax regulations.

  • Amendments 

The Finance Bill 2020 was presented by the Minister of Finance in the Parliament on 1st February, passed by the Parliament on 23rd March, and received Presidential assent on 27th March 2020.

The bill made more than 40 amendments. However, it initially proposed the following number of amendments –

  • Direct taxes – 102
  • Indirect taxes –
  1. Goods and Services Tax – 1
  2. Central Goods and Services Tax – 16
  3. Integrated Goods and Services Tax – 2
  4. Union Territory Goods and Services Tax – 4
  5. Customs – 9
  6. Customs tariff – 2

Several other amendments were also proposed for health cess, Finance Act 2001, Finance Act 2013, etc.

  • Changes to income tax slabs 

The Indian Income Tax Act 2020 proposed a new income tax regime for taxpayers in India. Taxpayers can either opt for the new tax slabs and rates as per FY2020-21 or continue to abide by the FY2019-20 rules.

New FY2020-21 tax regime –

Tax slabs Tax liability 
Up to Rs.2.5 lakh Zero
Rs.2.5 lakh to Rs.5 lakh 5%
Rs.5 lakh to Rs.7.5 lakh Rs.12,500 + 10%
Rs.7.5 lakh to Rs.10 lakh Rs.37,500 + 15%
Rs.10 lakh to Rs.12.5 lakh Rs.75,000 + 20%
Rs.12.5 lakh to Rs.15 lakh Rs.125,000 + 25%
Above Rs.15 lakh Rs.187,500 + 30%

This new FY2020-21 income tax regime will be applicable to taxpayers of all ages.

It should be noted here that those opting for this tax regime have to forfeit all the 70 income tax exemptions, some of which include –

  • Deductions mentioned in Chapter VI A (Excluding Section 80CCD (2) and 80JJA).
  • Section 10(14) – Children education allowance, helper/assistant allowance, conveyance allowance, etc.
  • Section 24(b) – Deduction of interest on house property.
  • Section 80EEA – Deduction for interest paid on home loan for affordable housing.
  • Section 80EEB – Deduction for interest on Loan for Purchase of Electric Vehicles.
  • Section 80E – Interest on education loan.
  • Section 80D – Deduction in respect of health insurance premium.
  • Section 80G – Deductions on donations to religious/charitable funds, etc.
  • Section 80GGA – Deduction for donations made for rural development/scientific research.
  • Section 80GGC – Deduction in respect of contributions made by any person to political parties.
  • Section 10(5) – Leave Travel Allowance (LTA).
  • Section 10(13A) – House Rent Allowance (HRA).
  • Section 16 – Standard deduction, professional tax, and entertainment tax.

Existing FY2019-20 tax regime –

Tax slabs Tax liability 
For individuals under the age of 60 
Up to Rs.2.5 lakh Exempt
Rs.2.5 lakh to Rs.5 lakh 5%
Rs.5 lakh to Rs.10 lakh Rs.12,250 + 10%
Above Rs.10 lakh Rs.112,500 + 30%
For senior citizens
Up to Rs.3 lakh Exempt
Rs.3 lakh to Rs.5 lakh 5%
Rs.5 lakh to Rs.10 lakh 20%
Above Rs.10 lakh 30%
For super senior citizens
Up to Rs.5 lakh Exempt
Rs.5 lakh to Rs.10 lakh 20%
Above Rs.10 lakh 30%

Taxpayers continuing to pay their taxes on income under the existing regime will be able to receive benefits under the applicable sections.

Those belonging to the income tax slab between Rs.2.5 lakh and Rs.5 lakh will receive a tax rebate of Rs. 12,500 under both the regimes mentioned above.

  • New corporate tax rules 

The new Income Tax Act 1961 has inserted Section 115BAA, where some domestic companies can pay a corporate tax of 22% +10% surcharge and 4% cess from FY 2019-20 (AY 2020-21). However, such companies have to forfeit certain income tax deductions. These include –

  • Deductions under Chapter VI-A, with respect to certain incomes that are allowed under Sections 80IA, 80IAB, 80IAC, and 80IB.
  • Deductions under Section 35 for expenditure made towards scientific research, or a research association, university, IIT or national laboratory.
  • Deductions under Section 33AB for companies dealing in tea, coffee, and rubber.
  • Deductions made through provisions under Section 10AA for companies operating inside special economic zones (SEZs).
  • Investment allowance under Section 32AD towards purchase of new machinery and added depreciation under Section 32 made in select areas in the states of Telangana, Andhra Pradesh, West Bengal, and Bihar.

Companies can opt to be taxed under this new rule before the usual income tax filing date – 30th July (extended to 30th November in case of AY 2020-21).

  • Abolishment of Dividend Distribution Tax (DDT)

The Finance Act 2020 abolished the Dividend Distribution Tax (DDT), where companies had to pay a 15% tax for paying dividends to their shareholders. On the other hand, shareholders were exempt from paying any tax on dividend amounting up to Rs. 10 Lakh.

Now, TDS of 10% will be applicable on dividend in excess of Rs. 5,000 per year for shareholders.

  • Amendments to tax residency rules for non-residents

Earlier, income tax rules considered an NRI as a taxpayer if he/she spent 182 days residing in the country. This rule has been subject to significant mistreatment; earning NRIs would spend less than 182 days in India, thereby making them free of any tax liability.

This rule has now been amended, and the period of stay reduced to 120 days. However, NRIs will only be subject to taxation if their cumulative earning is Rs. 15 lakh or above.

Permanent Account Number (PAN)

Section 139A of the Income Tax Act, 1961 specifically lays down the framework of Permanent Account Number (PAN) – who can apply, who should apply, transactions for which quoting PAN is mandatory, and that an individual or an organisation can only have one PAN.

The primary objective of PAN is to eliminate money laundering and reduce economic malpractices. It is mandatory to quote PAN when filing income tax returns or to conduct any transactions as per regulations under this act.

Individuals should take note of the amendments made for income tax regulations each year to remain abreast of their tax liabilities.