Significant changes in income-tax rules

1. TCS provisions relating to foreign remittances

Finance Bill 2020 had proposed new provisions for tax collections at source relating to foreign remittances. The authorised dealer or bank, through which the remittance was sent out of India under the Reserve Bank of India’s Liberalised Remittance Scheme (LRS), had to collect tax at source at 5 per cent on remittances of above ₹ 7 lakh.

The Bill did not specify whether the tax collected at source (TCS) was on the full remittance amount if it exceeded ₹7 lakh or the amount by which the remittance exceeded ₹7 lakh.

The Finance Act has clarified specifically that only foreign remittances (other than those to seller of an overseas tour programme) above ₹7 lakh will be subject to TCS. That is, only the incremental amount above ₹7 lakh will be taxed. In addition to, there will be no threshold for foreign remittances applicable to seller of an overseas tour programme. The whole amount will be subject to TCS.

2. No TDS provisions on MF capital gains

From FY2020-21 onwards, dividend distribution tax has been abolished and the dividend is taxable in the hands of the recipient. Corresponding provisions were incorporated for deducting tax at source at 10 per cent on payments made to mutual fund unit-holders.

This created confusion whether TDS (tax deducted at source) would apply even on redemption proceeds. The Finance Act, 2020 now has specifically excluded capital gains from the TDS provisions that are applicable on payments by fund houses to unit-holders.

3. TDS provisions on dividends to non-residents

The rate at which dividend is taxed in the hands of non-residents is at 20 per cent. However, while making payments to a non-resident, a company has to deduct tax under Section 195 of the Income Tax Act.

The rate of TDS for non-residents is 30 per cent but now The Finance Act has amended the TDS rate on dividends paid to non-residents to 20 per cent.