The Finance Act, 2020 received Presidential assent on 27 March 2020, giving legal effect to the proposals introduced in the Union Budget earlier that year. The Act brought wide-ranging changes across direct and indirect taxes, aiming to boost investment, simplify compliance, and rationalise tax structures.
Key highlights included a new optional income tax regime for individuals, expansion of the dividend distribution tax (DDT) abolition framework, relief for cooperatives, and new rules around tax audits, residency, and dispute resolution. At the same time, it introduced anti-abuse provisions to protect revenue, such as widening the scope of tax deduction at source (TDS) and addressing cross-border residency loopholes.
This blog provides a detailed walkthrough of the Act’s provisions, explaining both the intent and the implications for taxpayers.
Key Highlights of the Finance Act, 2020
1. Rate of Income Tax for Individual and HUF (Optional Scheme)
The Act introduced a new optional tax regime under Section 115BAC, offering reduced tax rates for individuals and HUFs if they forgo certain exemptions and deductions.
The slab rates under the optional regime were:
- 5% for income from ₹2.5 lakh to ₹5 lakh
- 10% for ₹5 lakh to ₹7.5 lakh
- 15% for ₹7.5 lakh to ₹10 lakh
- 20% for ₹10 lakh to ₹12.5 lakh
- 25% for ₹12.5 lakh to ₹15 lakh
- 30% for income above ₹15 lakh
Taxpayers opting for this regime could not claim deductions like Section 80C, 80D, HRA, LTA, and others. The aim was to simplify taxation while giving individuals a choice.
2. Tax on Dividend Income
The Act abolished the Dividend Distribution Tax (DDT) and made dividends taxable in the hands of shareholders. Companies were required to deduct TDS at 10% on dividends paid to residents exceeding ₹5,000.
Non-residents were taxed at rates specified under applicable treaties. This shift increased transparency, aligning India with global practices where investors, not companies, bear the tax on dividends.
3. Concessional Tax Rate for Co-operatives
A new Section 115BAD allowed cooperative societies to opt for a 22% concessional tax rate, provided they did not claim specified deductions or exemptions. This paralleled the earlier concessional regime introduced for corporates under Section 115BAA.
The move was designed to make cooperatives more competitive while ensuring a level playing field across business structures.
4. Tax Audit Threshold increased
The turnover threshold for tax audit under Section 44AB was raised from ₹1 crore to ₹5 crore, subject to two conditions:
- Cash receipts do not exceed 5% of total receipts.
- Cash payments do not exceed 5% of total payments.
This change reduced compliance for small businesses and encouraged digital transactions.
5. Residency Provisions
Two major changes were made:
- An Indian citizen or person of Indian origin staying in India for 120 days or more (instead of 182 days) would be considered resident, provided their total income (other than foreign income) exceeded ₹15 lakh.
- An Indian citizen not liable to tax in any other country would be deemed resident in India.
These provisions were targeted at curbing misuse of residency rules by high net-worth individuals seeking to avoid taxation.
6. Tax Treatment of ESOPs issued by Eligible Start-ups
To support start-ups, the Act deferred the taxation of ESOPs granted by eligible start-ups. Employees were required to pay tax within 14 days from the earliest of the following:
- 5 years from the end of the year in which ESOPs were allotted,
- Date of sale of such shares, or
- Date of the employee leaving the company.
This relieved employees from upfront tax liability at the time of allotment, improving cash flow.
7. Provisions related to Charitable Trusts and Institutions
The Act mandated all charitable trusts, institutions, funds, universities, and hospitals to revalidate their registration under Section 12AA, 10(23C), and 80G. Validity of new registrations was limited to 5 years, requiring periodic renewal.
This ensured greater transparency and accountability in the charitable sector.
8. Taxpayer’s Charter
A landmark provision empowered the government to notify a “Taxpayer’s Charter” under the Income-tax Act. The objective was to ensure fair, transparent, and accountable treatment of taxpayers, while setting standards for efficiency and grievance redressal.
9. Vivad Se Vishwas Scheme
The Act gave effect to the Direct Tax Vivad se Vishwas Act, 2020, offering taxpayers a chance to settle pending disputes by paying the disputed tax and getting waiver of interest and penalties.
The scheme aimed to reduce litigation and unlock blocked revenue.
10. Faceless Appeals
The Act empowered the government to introduce faceless appeal procedures before Commissioners (Appeals). This extended the principle of faceless assessments, reducing scope for personal interaction, and promoting transparency.
11. Other Direct Tax Amendments
- TDS on E-commerce Transactions: Section 194-O introduced TDS at 1% on payments made by e-commerce operators to participants.
- TCS on Foreign Remittances and Overseas Tour Packages: Section 206C(1G) introduced TCS on foreign remittances under LRS above ₹7 lakh and on sale of overseas tour packages.
- Equalisation Levy: Extended to 2% on e-commerce supply of goods and services by non-resident e-commerce operators.
12. Indirect Tax Proposals
The Finance Act also introduced several changes in customs law:
- Empowered government to prohibit import/export of goods for preventing injury to economy or security.
- Enhanced powers to curb undervaluation and fraudulent practices.
- Amendments to safeguard duty, countervailing duty, and anti-dumping provisions for better trade protection.
M2K Remarks
The Finance Act, 2020 balanced tax relief with measures to plug revenue leakages. By offering an optional regime for individuals, concessional rates for cooperatives, and relief for start-ups, it provided incentives for compliance and investment. At the same time, stricter residency provisions, TDS/TCS expansions, and anti-abuse measures ensured the tax base was not eroded.
The introduction of the Taxpayer’s Charter and faceless appeals signalled a shift toward a more transparent, trust-based tax administration. Overall, the Act reflected the government’s twin priorities: ease of compliance and safeguarding revenue.
