Introduction
The Union Budget 2021 focuses on economic recovery, financial sector reforms, infrastructure development, and ease of doing business. The government announced several initiatives aimed at supporting startups, strengthening the banking system, improving infrastructure, and simplifying tax compliance for individuals and businesses.
This article summarizes the key highlights of Budget 2021 and the major direct tax and policy changes that impact businesses, professionals, and taxpayers.
Start-ups and Entrepreneurship
The government introduced several measures to encourage innovation and support the startup ecosystem:
• Tax incentives for startups have been extended, including capital gains exemption for investments in startups.
• The eligibility period for claiming the startup tax holiday has been extended to March 2022.
• Incorporation of One Person Companies (OPCs) has been simplified, and NRIs are now allowed to incorporate OPCs in India.
• Margin money requirements for bank finance have been reduced from 25% to 15% for startups.
• Allocation for MSME development doubled to ₹15,700 crore for FY 2022.
These reforms aim to boost entrepreneurship and encourage business formation in India.
Banking and Financial Sector Reforms
Several major reforms were announced to strengthen the financial sector:
• A new Development Finance Institution (DFI) will be established with a capital of ₹20,000 crore.
• The DFI will target lending of ₹5 lakh crore within three years.
• The government plans to privatize two public sector banks and one general insurance company.
• Deposit insurance coverage for bank depositors has been increased from ₹1 lakh to ₹5 lakh.
These reforms aim to strengthen banking stability and increase investment capacity.
Infrastructure and Transport
Infrastructure development remains a key priority:
• ₹1.18 lakh crore allocated for Road Transport and Highways.
• Introduction of an Infra-National Rail Plan to reduce logistics costs and improve the railway system by 2030.
• Expansion of metro rail systems in major cities.
• Introduction of Metro Lite and Metro Neo systems for Tier 1 and Tier 2 cities.
These initiatives aim to improve connectivity and economic productivity.
Agriculture Sector Initiatives
The agriculture sector received increased focus through several initiatives:
• Agriculture credit target increased to ₹16.5 lakh crore for FY 2021–22.
• 1,000 additional mandis will be integrated into the e-NAM marketplace.
• Agriculture Infrastructure Fund will support improvements in APMC infrastructure.
These measures aim to improve agricultural markets and farmer income.
Financial Market Reforms
To strengthen financial markets and improve investor protection:
• A single Securities Market Code will be introduced.
• A FinTech hub will be developed at GIFT IFSC.
• Investor protection will be enhanced through a universal investor charter.
• Asset Reconstruction Company (ARC) and Asset Management Company (AMC) will be created to resolve stressed assets.
These reforms are intended to strengthen capital markets and improve financial transparency.
Foreign Direct Investment and Disinvestment
The government announced important changes to FDI and disinvestment policy:
• FDI limit in the insurance sector increased from 49% to 74%.
• The government aims to raise ₹1.75 lakh crore through disinvestment.
• IPO of LIC is proposed.
• Public sector enterprises will be privatized in sectors outside strategic areas.
These initiatives are expected to increase private investment and improve efficiency.
Fiscal Position
The fiscal deficit for FY 2021–22 has been estimated at 9.5% of GDP, funded primarily through government borrowing.
The government aims to gradually reduce the fiscal deficit to 4.5% by FY 2026–27.
States will also be allowed to raise borrowings up to 4% of GDP to support development expenditure.
Corporate Law and Compliance
Several changes have been introduced to simplify corporate compliance:
• Launch of MCA Version 3.0 to simplify compliance and adjudication processes.
• Maximum paid-up capital threshold for small companies increased from ₹50 lakh to ₹2 crore.
• Maximum turnover threshold increased from ₹2 crore to ₹20 crore.
• Residency requirement for incorporating One Person Companies reduced from 182 days to 128 days.
These reforms aim to reduce compliance burdens for small businesses.
Direct Tax Highlights
Individual Tax Rates
No changes were made to the individual income tax slab rates.
Corporate Tax Rates
Corporate tax structure remains unchanged:
• 25% tax rate for domestic companies under Section 115BA.
• 22% tax rate for domestic companies under Section 115BAA.
• 15% tax rate for new manufacturing companies under Section 115BAB.
These rates remain part of the government's long-term tax reform strategy.
Major Direct Tax Changes
Goodwill Depreciation Removed
Goodwill will no longer be treated as a depreciable asset under the Income Tax Act. The written-down value of goodwill will now be considered for capital gains calculation.
Relief for Senior Citizens
Senior citizens aged 75 years and above with only pension and interest income will no longer be required to file income tax returns. The bank will deduct tax directly.
Increase in Tax Audit Threshold
The tax audit limit has been increased from ₹5 crore to ₹10 crore for businesses where 95% of transactions are digital.
Capital Gains Changes
Certain unit-linked insurance policies that do not qualify for exemption will now be taxable under capital gains.
Changes were also introduced in taxation of goodwill and revaluation of partnership assets.
TDS and TCS Changes
TDS on Purchase of Goods
Under Section 194Q, a buyer must deduct TDS at 0.1% on purchases exceeding ₹50 lakh from a seller if the buyer’s turnover exceeds ₹10 crore in the previous financial year.
Higher TDS for Non-Filers
Under Section 206AB, higher TDS rates will apply to taxpayers who have not filed income tax returns for the previous two years.
Miscellaneous Tax Proposals
Additional proposals include:
• Introduction of prefilled income tax returns using available data such as interest, dividends, and capital gains.
• Establishment of Faceless Income Tax Appellate Tribunal Centres.
• Creation of a Dispute Resolution Committee for small taxpayers.
• Tax on PF contributions exceeding ₹2.5 lakh annually.
• Introduction of Agriculture Infrastructure and Development Cess on petrol and diesel.
Conclusion
Budget 2021 focuses on economic revival through infrastructure investment, financial sector reforms, and improved ease of doing business.
While individual tax rates remain unchanged, several structural reforms and compliance simplifications have been introduced to support businesses, startups, and taxpayers.
These policy measures are expected to enhance financial stability, promote entrepreneurship, and strengthen India’s economic recovery in the coming years.
