Budget 2020: All personal finance related changes

On the personal finance front, Budget 2020 has not lived up to the expectations of the taxpayers.

Here are the changes proposed under the Union Budget 2020 in personal finance –

Deposit Insurance Cover Raised to 5 lakhs from 1 lakh

The money we keep in our savings account or as a fixed deposit with our banks is insured in the event of the bank going bankrupt. This insurance is provided by the Deposit Insurance and Credit Guarantee Corporation (DICGC) under the framework and regulations provided by RBI.

Uptil now the limit on this deposit insurance was Rs 1 lakh per individual per bank (not per bank account). This has been raised to 5 lakhs by the FM in today's budget.

This is good news - more of your money is safe now.

Also, note that this guarantee/insurance applies to all scheduled commercial banks including small finance banks like Ujjiwan, Fincare etc which provide higher interest rates on deposits than the mainstream banks like SBI, ICICI and HDFC Bank.

So now it could be worthwhile to have FDs of up to 5 lakhs with such small finance banks and enjoy higher interest rates without any risk of default. One could consider 2-3 such banks and earn higher interest on 10-15 lakhs.

New Income Tax Rates

Although an optional new tax regime with lower tax rates has been introduced, you can only avail of it if you let go of all deductions that you have been taking till now. This means letting go of the 80C deduction, HRA deduction, standard deduction etc.

Here are the new income tax slabs and rates should you choose to opt for them:

Income Slab Old Tax Rate New tax Rate*
0 to 2.5 lakhs Nil Nil
2.5 to 5 lakhs 5%* 5%*
5 to 7.5 lakhs 20% 10%
7.5 to 10 lakhs 20% 15%
10 to 12.5 lakhs 30% 20%
12.5 to 15 lakhs 30% 25%
Above 15 lakhs 30% 30%
*You have to give up all deductions (80C, NPS, HRA etc) if you want to avail the new tax rates.

Note: Individuals having net taxable income of up to Rs 5 lakh will be able to avail tax rebate of Rs 12,500 under section 87A in both, the existing and new tax regimes. Effectively, this would mean that individual taxpayers having net taxable income of up to Rs 5 lakh will continue to pay zero tax.

This is the biggest disappointment from the budget.

In practice, one could easily rack up deductions of 2-3 lakhs from one's income by virtue of standard deduction, 80C, HRA, NPS etc. Since one has to let go of all this in order to avail the new tax rates, it effectively nullifies any benefit.

In fact, for people who were making full use of all deductions, sticking to the old tax rates would generally be more beneficial!

The new tax rates are better for people who could not avail of deductions earlier for whatever reason.

In my opinion, having two parallel income tax rate regimes have just made things more complicated for small tax payers without bringing much benefit.

Dividend Distribution Tax Abolished

This too sounds better than it really is.

Although the Dividend Distribution Tax has been abolished at the company level but now it will be taxable at the hands of the investor as per their income tax slabs.

Until now the companies were liable to pay DDT of 15% plus surcharge and cess for the dividend distributed by them. This also applies to Mutual Funds. Currently, mutual funds pay DDT of 11.648% on equity funds and 29.12% on debt funds.

As per the new budget, there would be no DDT for mutual funds also now and the dividend income will be taxable in the hands of the investor as per her income tax slab.

However, there will be a TDS of 10% on dividend payment by mutual funds and companies.

(The concept of TDS basically ensures the government still gets it dues to some extent even if the tax payers fail to comply).

So earlier while the company/Mutual Fund itself would deduct the tax at a flat rate while distributing the dividend and the dividend income received would be tax-free at your end, now the tax liability has been moved to your end.

If you are in the higher tax brackets, this means more tax for you if you opt for the dividend option of Mutual Funds.

Until now, some investors would choose dividend option of a Mutual Fund because dividends were taxed at lower rates than capital gains or ordinary income. Now dividend income will be taxable as ordinary income, hence investing in dividend option of Mutual Funds is pretty much pointless for almost everyone.

Changes for NRIs

Budget 2020 has lowered the number of days of stay in India for one to be treated as a resident Indian.

If an individual who is a citizen of India or person of Indian origin visits India for 120 days or more in a financial year and had spent more than 365 days in last four years, then such an individual will also become ‘resident’ in India (and hence pay tax in India on all your domestic and foreign income). Earlier this number was 182 days. Like other changes, this will also be applicable from FY 2020-21 onwards.

No changes for NRIs regarding Mutual Fund investments apart from dividends being taxable as mentioned above (same as for resident Indians).

There was some confusion earlier that NRIs who don't pay any tax anywhere will have to pay tax in India on their global income but it has now been clarfied by the Finance Ministry that such NRIs will have to pay tax only on their income from India and not their global income.

We will keep updating this post as we get more information/explanation on the budget.