10 Key Terms in the Budget Book and Their Definitions You Must Know

Budget

10 Key Terms in the Budget Book and Their Definitions You Must Know

Budget

On February 1, Finance Minister Nirmala Sitharaman will deliver the final (interim) Budget before the general elections of 2024, a date that millions of taxpayers nationwide are excitedly anticipating. Taxpayers anticipate a number of things, such as lower tax rates, the introduction of tax exemptions, and lower TDS (tax deducted on source) on virtual digital assets (VDA).

It is essential to first define some basic phrases so that the average taxpayer may grasp them before outlining further expectations.

Ten essential terms to comprehend

Tax deduction

As the name implies, it’s the amount that is subtracted from your taxable income in order to reduce your tax liability. Taxpayers can deduct ₹50,000 as a standard deduction, for example. This indicates that ₹50,000 is deducted from total income to determine taxable income.

 
Similarly, if you invest in tax-saving FDs, PPFs, or NSCs, you can deduct up to ₹1,50,000 from your taxes (section 80C).

Rebate

A rebate is an amount that lowers the overall income tax. Taxpayers can lower their tax component by the amount of the refund, just as they can lower their taxable income through a deduction. It is typically provided to reduce taxpayers’ tax burdens in order to boost economic activity.

Tax surcharge

A surcharge is imposed on individuals whose income exceeds ₹50 lakh. It only affects the amount of tax due, not the overall income. The tax rate of thirty percent is subject to a ten percent surcharge, making the overall tax obligation thirty-three percent.

Cess on tax

This is a type of tax, a levy, that is placed on income tax in order to collect money for certain uses like healthcare and education. The cess rate, which is now 4 percent, is applied at this uniform rate to all income slabs. On tax liability, including surcharge, a cess is assessed.

This won’t be stopped until the government has amassed sufficient funds to accomplish its goals.

New tax regime

Introduced in 2022, this tax regime comprises seven tax bands that offer concessional tax rates. If an individual’s income exceeds ₹15 lakh, they are subject to the highest tax rate of 30 percent, which eliminates the majority of tax deductions.

The new tax system took effect in the 2023–2024 fiscal year as the default tax system.

Old tax regime

The former tax system included four tax slabs, with the highest tax rate of 30% being applied to incomes above ₹10 lakh. All tax deductions that are no longer available under the previous tax regime are still available under this one.

TDS (Tax deducted at source)

This is how taxes are collected at the source of revenue, such as when corporations transfer dividend money or banks transfer interest income.

Tax-saving strategies

These are savings vehicles, like PPF, NSC, and NPS, that allow taxpayers to deduct certain amounts from their income taxes. It is important to keep in mind that under the new tax law, a number of these deductions are no longer allowed.

Tax collection at source (TCS)

 A seller’s excess tax that is gathered from the buyer at the time of sale and deposited with the tax authorities is known as tax collection at source

For example, unless there are extenuating circumstances, a TCS of 20 percent is required of persons who wish to remit more exceeding ₹7 lakh in a financial year.

Virtual digital assets (VDAs)

These are the digital assets that are subject to the 2022 tax system, which levies 30% on capital gains and 1% TDS on sales and purchases. Digital currencies like dogecoin, ethereum, bitcoin, and others are included in VDAs.

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Trust or Commission – Taxability and Amendments’23

As per Section 10(46) of the Income Tax Act, 1961, any specified income arising, on or after 1-6-2011, to a body or authority or Board or Trust or Commission or a class thereof which is constituted or established by or under a Central, State or Provisional Act or constituted by the Central Government or a State Government, with the object of regulating or administering any activity for the benefit of the general public shall be exempt if it is not engaged in any commercial activity; and is notified by the Central Government for the purpose of this section 10(46).

 

For the purposes of this clause ‘specified income’ means the income, of the nature and to the extent arising to a body or authority or Board or Trust or Commission (by whatever the name called) referred to in this clause, which the Central Government may, by notification in the Official Gazette, specify in this behalf. Recently, Honorable Supreme Court has had an occasion to deal with the applicability of exemption u/s 10(46) in the case of any authority or Board or Trust or Commission or anybody while delivering its landmark judgment in the case of ACIT (Exemptions) vs AUDA (CA No 11762/2017 vide its order dated19th October, 2022) reported in (2022) 6 NYPCTR 1180 (SC).

 

 

While elaborating the said issue, Honorable Supreme Court has made a fine distinction in respect of statutory authorities, board or any such authorities established by State or Central Government for the purpose of achieving essentially public functions/services. Honorable Court has held that that amounts or any money charged by such authorities for the public services rendered by them are prima face not commercial or business receipts as their primary object is that of advancement of public purposes functions.

 

In order to bring clarity on the interpretation and observation made by Honorable Apex Court, a new clause (46A) is proposed to be introduced to provide for exemption of income arising to a body or an authority or a board or a trust or a commission, not being a Company, which has been establishment or constituted by or under a Central or State Act with one or more of the following purposes viz:

 

  • Dealing with and satisfying the need for housing accommodation;
  • Planning, development or improvement of cities, towns and villages;
  • Regulating or regulating and developing, any activity for the benefit of the general public; or
  • Regulating any matter, for the benefit of the general public, arising out of the object for which it has been
    created.

 

It may also be noted that such authority or a board or a trust or a commission is required to be notified by the Central Government in the Official Gazette for the purposes of this clause’

A consequential amendment is also proposed in Explanation to the 19th proviso of clause (23C) of section 10. Similarly, the consequential amendment is also proposed in sub section (7) of section 11.

 

Taxation of Charitable Trusts and Institutions:

The scheme of Charitable Trusts and Institutions has been completely changed by substantial amendments/substitutions of the provisions of section 10(23C)/11 and 12 and relevant registration procedures.

 

At present exemption to these trusts or institutions is available under the two regimes

 

The regime for any fund or institution or trust or any university or other educational institutions or any hospital or other medical institution referred to Section 10(23C) (clause iv, v or vi or via) of the Act (hereinafter referred to as trust or institution under first regime); and

The regime for the trusts registered under section 12AA/12AB of the Act (hereinafter referred to as trust or institution under the second regime).

 

 

Section 12A of the Act, inter alia, provides for the procedure to make an application for the registration of the trust or institution to claim an exemption under sections 11 and 12 of the Act. Section 12AB of the Act is the new section that comes into effect on 1st April 2021.

 

Treatment of donation to other trust:

The income of the trusts and institutions under both regime is exempt subject to the fulfilment of certain conditions. Some of such conditions are as under:

1) . At least 85% of income of the trust or institution should be applied during the year for the charitable or religious purposes to ensure bare minimum application for charitable or religious purposes.

2). Trusts or institutions are allowed to either applied mandatory 85% of their income either themselves or by making donation to the trusts with similar objects.

3). If donated to other trusts or institutions, the donation should not be towards corpus to ensure that the donations are applied by the done trust or institution.

 

Thus, every trust or institution under both regimes is allowed to accumulate 15% of its income each year.

 

Read More: Budget 2023 enhances scope of taxation for Reits/InvITs

 

In order to plug loophole and possible misuse of this provision by trying to defeat the intention of the legislature by forming multiple trusts and accumulating 15% at each layer, it is proposed that only 85% of the eligible donations made by the trust or institution under the first or the second regime to another trust shall be treated as applicable.

 

Relevant appropriate amendments are made in provisions of Section by inserting clause (iii) in Explanation2 2 of the third proviso of clause (23C) of section 10 of the Act and clause (iii) in Explanation 4 to sub section(1) of section 11 of the Act.

 

Budget 2023 enhances scope of taxation for Reits/InvITs

Budget 2023 on February 1 enhanced the scope of taxation of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (INvITs) by including income that was not previously taxable.

 

These will be taxed in the hands of unit holders from April 1, 2024.

 

Dual non-taxation of any money distributed by the business trust, i.e., which is exempt in the hands of the trust as well as the unit holder, is not the intent of the special taxation regime applicable to such investment vehicles, the Budget document said.

 

 

“The amendment proposed for REIT/InVIT related to distribution by manner of ‘Repayment of debt’ to the unitholders is now covered under the ambit of taxation as other income (net of cost of acquisition of the unit) which earlier was not captured. This was acting as an incentive for many sponsors. Any foreign investor receiving the said distribution will be taxed at 40 percent plus surcharge,”

 

These amendments will take effect from April 1, 2024 and will apply to assessment year 2024-25 and subsequent assessment years, the Budget document said.

 

Scope of taxation of money distributed by business trusts has been enhanced to include income not previously covered, a tax expert said.

 

“Taxability of return of capital in case of REITs would force a relook at the distribution models of REITs,”

 

 

REIT Rules

 

REITs are investment vehicles that own, operate and manage a portfolio of income-generating properties for regular returns. REITable properties in India will include commercial assets – primarily office space – that can generate steady rental income.

 

They operate like mutual funds or shares. REITs have to be mandatorily listed on exchanges and traded like securities. Small investors can buy units in REITs from both primary and secondary markets just as they buy shares or mutual funds.

 

 

As per the guidelines for REITs, 80 percent of the company’s assets must be invested in completed projects, and only 20 percent in under-construction projects, equity shares, money market instruments, cash equivalents, and real estate activities. To ensure regular income to investors, it has been mandated to distribute at least 90 percent of the net distributable cash flows to the investors at least twice a year.

 

 

Income From Other Sources

“Interest, dividend and rental incomes have been accorded a pass-through status at the level of business trusts and are taxable in the hands of the unit holder. However, in respect of the distributions made by the business trust to its unit holders, which are shown as repayment of debt, are actually distributions of surplus cash and it is seen that it did not suffer taxation either in the hands of business trust or in the hands of the unit holder.”

 

“It is proposed to make such sums received by a unit holder taxable in his hands. Hence Section 56(2)(xii) is proposed to be inserted to provide that such income shall be included as income from other sources received by a unit holder from a business trust.”

 

The budget document noted that that Finance (No.2) Act, 2014 introduced a special taxation regime for REITs and InVITs (commonly referred to as business trusts).

 

The special regime was introduced in order to address the challenges of financing and investment in infrastructure. The business trusts invest in special purpose vehicles (SPVs) through equity or debt instruments.

 

Read More: NEW INCOME TAX SLABS 2023-24 FOR SENIOR CITIZENS: OLD VS NEW

 

Keeping in mind the business structure, the special taxation regime under section 115UA of the Act, inter-alia, provides a pass-through status to business trusts in respect of interest income and dividend income received by both of them from an SPV and rental income in case of REIT.

 

Such income is taxable in the hands of the unit holders unless specifically exempted, the document said.