Key Learnings from 2021 about Income Tax

The Finance Act is a legal way by which the Indian govt. controls financial policy. The Act applies to the entire country. Only Jammu and Kashmir and Andaman and the Nicobar Islands are exempt. It contains changes to policies about income tax, customs, GST, etc. 

Initially, a Financial Bill is presented in the parliament. This is done in the last week of February. After some changes, it is passed by the Parliament. Then the President of India approves it, and the bill becomes the Finance Act. The Finance Act 2020 contained rules for direct and indirect taxes effective from 1st January 2021. Direct taxes are fixed taxes that you pay directly to the govt. Income Tax, Property Tax, and Wealth Tax are direct taxes. Indirect taxes are the ones you pay to other people. GST, excise duty, etc., are indirect taxes. 

The Finance Act 2021, which came into effect on 1st July 2021, overrides Finance Act 2020.

Income Tax Rules 2021

The Income Tax Act 1961 governs different tax regulations in India. It contains legal policies regarding the payment of Income Tax. It ensures that taxes are managed properly by the Indian Govt. However, the Finance Act has the power to amend this Act. This is done to keep inflation in check. It is also done to match the laws with the economy. There are minor changes in Income Tax Rules change every year. Taxpayers must be aware of the changes to the income tax rules 2021 brought by the Finance Act, 2021.

Key takeaways from changes to Income Tax Rules 2021

The Finance Act 2021 came into effect on 1st July 2021. The Income Tax (IT) Rules changes were not as major as in 2018. The changes to the Income Tax Rule for 2021 are as follows: 

1. TDS/TCS deduction at the original (higher) rate is now in effect. Tax Deducted at Source (TDS) is a tax that is deducted before a person, or a business makes an income. The aim is to avoid tax evasion. TDS is deducted only if the payment exceeds a certain threshold limit. 

The key amendments are for the purchase of goods, the pension income of eligible senior citizens, and higher TDS rates for people who don’t file ITR. 

They are as follows:

• From 1st July, a higher rate was deducted if you have not filed IT returns in the previous two years. Until Finance Act 2020, a higher TDS rate was deducted only for those who didn’t have PAN. The higher rate will be as follows:
  • Twice the rate specified in the Income Tax Act, or
  • Twice the rate in force, or 5% of the TDS rate
  • A higher value of TDS will be deducted from non-salary payments. As per the Finance Act 2020, there was a concession of 25% in certain cases.
  • Buyers of goods, responsible for paying any sum to any resident Indian, need to deduct tax @0.1% of the purchase amount. This shall be deducted if the purchase amount exceeds Rs. 50 Lakh. TDS needs to be deducted at the time of credit of the sum to the seller’s account. If there is a credit delay, it will be deducted at the time of payment.

2. As per the Finance Act, 2020, businesses with a turnover of more than Rs 5 crores would be liable to an audit. The Finance Act 2021 increased that limit to Rs. 10 crores. 

3. Resident senior‐citizen aged 75 years or more, earning only pension income, will be exempt from filing ITR. 
4. New tax slabs are now out in FY 2021-2022 but for AY 2022-2023. This means the new tax slab will only be applicable for IT returns in 2022-2023 and not in 2021-2022. Yearly income in the financial year (FY) is considered in the tax slabs.
5. The new tax slab of the Income Tax Rules 2021 applies to all individuals and is as follows:

• Income Rs 0-2.5 Lac: NIL
• Income Rs 2.5 Lac Rs – 3.0 Lac: 5% (tax rebate available)
• Income Rs 3.0 Lac Rs – 5.0 Lac: 5% (tax rebate available)
• Income Rs 5.0 Lac Rs – 7.5 Lac: 10%
• Income Rs 7.5 Lac Rs – 10.0 Lac: 15%
• Income Rs 10.0 Lac Rs – 12.5 Lac: 20%
• Income Rs 12.5 Lac Rs – 15.0 Lac: 25%
• Income Rs 15.0 Lac or above: 30%

7. As per the Finance Act 2020, an Equalisation levy was not applicable if the eCommerce operator’s sales, turnover, or gross receipts were less than ₹ 2 crores during the previous year. For turnovers of more than 2 crores, the levy was applicable for Non-resident eCommerce providers. In the case of residential providers, the person paying to purchase the goods or services would pay the levy. With the Finance Act 2021, non-resident e-Commerce operators are not liable to pay the 2% Equalisation levy on the value of the sale of goods. 
8. There is a reduction in the time limit for filing IT returns. The IT returns for FY 2020-2021 are paid in the Assessment year (AY) 2021-2022. The last date for the original/revised IT returns filing for the previous FY is 31st December of the relevant AY. Any late fees will be levied, if applicable. However, owing to the Covid-19 pandemic, the last date for AY 2021-2022 is 31st January 2022. 

9. Until Finance Act 2020, Limited Liability Partnerships (LLPs) and Hindu United Families (HUFs) were liable to taxation. Finance Act 2021 removed LLPs and HUFs from the taxation scope for professionals.

Conclusion

The Income Tax Act also called the Taxation Laws Act 2021, amended the IT Act 1961 and the Finance Act 2012. These changes in the Income Tax Rules for 2021 were introduced by the Finance Act 2021. The new tax rules provide lower rates, but businesses will need proper financial knowledge to thrive. The new rules were formed keeping in mind the effect of the pandemic and the possibility of another lockdown. 

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