As the new financial year kicks off, several new tax changes become applicable. You must keep yourself abreast with these tax changes as a diligent investor and save yourself from getting caught on the wrong foot. The below write up will help you precisely do that, as we cover some critical 2021 tax changes that every young investor must know.1. New rules on EPF taxation:
Till now, the interest earned by the subscriber in EPF was completely tax-free. However, the position changes effective April 1, 2021. Interest on any amount deposited in EPF more than INR 2.5 lacs per year will be taxable. A slight relaxation is given if no contribution is made by the employer in the fund for the entire year. For such cases, interest on the amount of contribution made more than INR 5 lacs will be taxable. It may be noted that the limit of INR 5 lacs is not of much use to private sector employees. The reason is that they are covered in EPFO Act, and the provisions mandate an employer to compulsorily contribute to the account.2. New rules for ULIP taxation:
Till now, returns from Unit Linked Insurance Plans (ULIP) were completely exempt from income tax. However, effective April 1, 2021, changes have been made to Section 112A of the Income Tax Act. This means that the income from ULIP will continue to be exempt as long as the amount of premium invested every year is not more than INR 2.5 lacs. In case the annual premium exceeds this amount, then the income from the ULIP will be taxable. The tax calculation will depend on the holding period & the equity component in the underlying funds. Also, note that:3. Need to file Form 10-IE to opt for the new tax regime:
- The limit of INR 2.5 lacs applies to the combined annual premium of all ULIP policies taken together.
- The new provision will only apply to ULIPs purchased after February 1, 2021.
- The amount received on death is still completely tax-free irrespective of the premium amount.
As per last year Budget announcement, now you have the right to choose the tax regime and inform your employer, who will deduct the TDS from your salary accordingly. This is not all. If you had opted for the new regime for Financial Year 2020-21, you need to also file a new Form 10-IE on the Income Tax portal when filing the tax return. This will help Income Tax Department to process your return as per the new regime. If you don’t do this step, the department can assume that you wish to stick to the old regime and process it as per the old regime’s provisions. So, don’t miss filling this form!4. Relaxation on calculating advance Tax on Dividend Income:
The dividend income has become taxable to the investors since April 1, 2020. Before this, it was tax-exempt in the hands of investors. Since it has become taxable, investors face a practical problem regarding the estimation of advance tax given the nature of this income. A relief has been given as per a new provision whereby penal interest under Section 234C will not be applicable on failure to assess the advance tax liability for dividend income.5. Exemption to senior citizens from filing ITR:
A new Section 194P has been inserted in the Act, which allows the senior citizen to do away with the requirement of filing a tax return if all of the following conditions are satisfied:6. Tighter deadlines for belated and revised returns:
- He/she qualifies as a “resident” as per Income Tax Act and age is above 75 years.
- His/her annual income consists only of pension and interest.
- He/she furnishes a declaration to the bank that he/she is not required to file an income tax return.
- The bank deducts applicable TDS from the income paid to the senior citizen basis the declaration made by the senior citizen.
- The bank is a “specified bank” as notified by Central Government.
The new tax provisions (effective for returns filed for FY 2020-21 and onwards) mandate the below:7. Other important provisions:
- The window for filing belated and revised returns has been reduced by 3 months. This means you could earlier file a belated or revised return for FY 2020-21 up to March 31, 2022. Now, you can only do it latest by December 31, 2021.
- Also, the late filing fee for belated return has been changed to INR 5.000. However, this fee cannot exceed INR 1,000 for cases where the total income is up to INR 5 lacs.
- If you have not filed your tax return and have a TDS/TCS deduction of more than INR 50,000 in the last 2 years, you will be subject to double the rate of TDS/TCS or 5%, whichever is higher.
- A new facility of pre-filled ITR will be available from April 1, 2021, containing details of capital gains, dividend income, etc.
- In a tax-friendly move, the time limit for reopening tax assessment has been reduced from 6 years to 3 years.
- You will have to pay a fee (up to INR 1,000) if you fail to link your Aadhaar with PAN by June 30, 2021, then.
- Deduction under Section 80EEA, which was available until March 31, 2021 has not been extended until March 31, 2022. You can benefit from this extension and avail of an overall deduction of INR 3.5 lacs in your tax return if you satisfy the conditions.
2021 has been a breakthrough of sorts, especially concerning the new EPF and ULIP related tax changes. You need to spend some time checking the implications of these changes on your financial position. Doing that on time will help you optimize your investments and save yourself from any tax penalties.
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