NEW DELHI: The recent Union Budget introduced a series of tax proposals aimed at reforming the landscape of direct and indirect taxes in the country. Not all of them, though, were palatable to taxpayers. While attempting to simplify the tax structure, the government unwittingly antagonised the middle class, the ruling party’s core vote bank. The hue and cry that followed forced the government to partially rollback one of its most controversial proposals — removal of indexation benefits on the sale of real estate.
We will get to that in a bit, but first the key highlights of the Budget tax proposals. They include an increase in the standard deduction to encourage the adoption of the New Tax Regime, minor tweaks in the tax slabs under the New Tax Regime, and changes in short- and long-term capital gains tax. For businesses, the biggest announcement came in the form of the abolition of angel tax, a levy that was anything but angelical. The Budget also tried to address the elephant in the room — unchecked equity F&O trading — by increasing the Securities Transaction Tax (STT) on derivatives trading.
Let’s first dig deeper into the controversy over long-term capital gains tax (LTCG) and the indexation benefit.
Curious case of indexation benefit
In her Budget speech, Finance Minister Nirmala Sitharaman announced that all forms of capital gains — either from financial or non-financial assets — would attract a tax of 12.5%. This was done with the intention of uniformity in taxation across all asset classes. Bureaucrats in the ministry of finance justified it by saying that the government doesn’t want any asset bias in taxation.
What was not mentioned in the FM’s speech, but smartly tucked away in the Finance Bill, was the fact that the government removed the indexation benefit on capital gains from non-financial assets such as real estate, gold, etc. It took some time for tax experts and investors to digest the impact of the government’s budget proposal.
Long-term capital gains from gold and real estate were taxed at 20% with indexation benefit, but by putting these assets in the same basket as equity, the government lowered the rate from 20% to 12.5% and removed the indexation benefit. What indexation does is it increases the purchasing cost of the asset by adjusting for inflation.
Say, a property bought at Rs 50 lakh in 2010 is sold at Rs 2 crore in 2024. However, after adjusting for 145% inflation over the 14 years, the cost price of the property comes around Rs 1.22 crore. At 20%, the long-term capital gains tax is Rs 15.50 lakh. But under the new provision without indexation benefit, the long-term capital gains tax @12.5% arrives at Rs 18.75 lakh.
The government had set the threshold of 1 April 2001, wherein any property bought before that would continue to avail indexation benefit. It put out calculations showing if the property prices increased by over 10-12%, the new LTCG tax rate of 12.5% would benefit the investors. But that was not enough to convince people, and the outrage that followed forced the government to tweak the provision.
The government has now offered a new choice to the resident individuals and Hindu Undivided Families (HUFs) that if one sells a property she bought before 23 July 2024, she can opt to pay a 20% LTCG tax while still benefiting from indexation. Else, taxpayers can choose to pay a reduced rate of 12.5% on LTCG without indexation. According to the amendments presented in the Finance Bill, taxpayers will have the flexibility to select the lower tax amount from these two options.
However, the amendment clarifies that for properties purchased after the cut-off date of July 23, 2024, the new regime alone will apply. This means that buyers will face the LTCG tax at a rate of 12.5% without the benefit of indexation.
Increase in Short-Term Capital Gains Tax Rate: The tax rate on short-term capital gains from the sale of equity shares or equity-oriented mutual funds held for less than 12 months has been raised from 15% to 20%. This change aims to limit the tax advantages previously enjoyed by high-net-worth individuals. However, this higher tax rate will also affect middle class taxpayers.
Increase in STT on Derivatives Trading: In response to the significant growth in derivatives trading, the government has proposed to raise the securities transaction tax (STT) on the sale of options in securities from 0.0625% to 0.1% of the option premium. Additionally, the STT on the sale of futures will increase from 0.0125% to 0.02% of the trading price of these futures.
Some solace for individual taxpayers
To promote the adoption of the New Tax Regime (NTR), the standard deduction has been increased from Rs 50,000 to Rs 75,000. The surcharge and education cess remain unchanged, and there are no modifications to the old tax regime. The Budget also tweaked the tax slabs under the New Tax Regime to bring a larger number of people under lower tax rates. For example, those who were earning between Rs 6-7 lakh are now in the 5% tax bracket instead of 10% earlier, and those earning between Rs 9-10 lakh will now pay 10% instead of 15%.
The government continues to load the tax benefits in favour of the New Tax Regime, which according to the finance minister has already been opted by two-thirds of individual taxpayers.
Hike in NPS deduction: Government employees currently receive a 14% deduction on their contributions to the National Pension System (NPS). In a recent change, the deduction for employer contributions to the NPS for private sector employees who choose the New Tax Regime has been increased from 10% to 14%.
Increase in Family Pension Deduction: The deduction on family pensions has been increased from Rs 15,000 to Rs 25,000, providing family pensioners with improved financial stability.
Surprise move on angel tax
Going against expectation, the government abolished the angel tax in Budget 2024. Angel tax is a levy applied to the funding received by startups from angel investors, especially when the investment amount surpasses the fair market value of the startup’s shares. It was a surprise because the industry had more or less convinced itself to live with it, especially after a couple amendments, making the angel tax ‘amenable’ to corporates. However, finance ministry officials explained that despite the amendments, the government felt it remained a nuisance for the industry, especially the startup ecosystem.
Rationalising TDS and TCS
Tax collected at source (TCS) and tax deducted at source (TDS) on income other than salary will now be considered for deduction of tax on salary income. This change aims to alleviate cash flow challenges for taxpayer employees by allowing them to claim TCS from sources like foreign remittances and vehicle purchases, as well as TDS on income from interest and dividends.
The government has also lowered the tax deducted at source (TDS) for certain individuals and Hindu Undivided Families (HUF) on rent payments exceeding Rs 50,000 per month to resident landlords, reducing the rate from 5% to 2%. This change aims to enhance compliance among taxpayers and boost the net rental income for those renting out their properties.
Credit of TCS for Minors’ Parents: Previously, tax collected at source (TCS) could only be claimed by the individual from whom it was collected. However, Budget 2024 proposes to permit parents to claim the TCS credit for their minor child’s income, provided that the minor’s income is included in the parents’ taxable income.
Taxing share buyback proceeds
Under the Budget 2024 proposal, buybacks will be taxable under the category of “income from other sources” for shareholders, at the applicable tax rate. Shareholders will not be able to deduct expenses related to this dividend income. The cost of acquisition incurred by shareholders will be classified as a capital loss, which can be carried forward and set off against relevant capital gains in the future. Companies executing buybacks will be required to withhold tax at a rate of 10%, applicable to domestic entities and non-residents based on treaty benefits. These changes will take effect for any buybacks conducted on or after October 1, 2024. This creates a short window for companies to distribute any excess cash in their possession.
A couple of others
Vivad se Vishwas Scheme, 2024: The Direct Tax Vivad se Vishwas Scheme, 2020 was launched to alleviate the backlog of income tax disputes and provide taxpayers with clarity and savings. In light of the scheme’s success and the increasing number of pending appeals at the CIT(A) level, a new Direct Tax Vivad se Vishwas Scheme, 2024 has been proposed. This scheme will take effect from a date to be announced by the government.
Tax Rate Changes for Foreign Companies and Abolition of Equalization Levy: The corporate tax rate for foreign companies has been reduced from 40% to 35%. Under the current regulations, non-resident e-commerce operators are subject to a 2% equalization levy (EL) on e-commerce supplies or services. To eliminate ambiguity and lessen the compliance burden, Budget 2024 proposes the abolition of the 2% EL, effective August 1, 2024. However, the 6% equalization levy on online or digital advertising will remain in place.
Customs duty on gold reduced to 6%
While the Budget introduced revisions to custom duties of many items with the aim of simplifying trade processes and minimising disputes, the one that hogged that limelight was the reduction in custom duties on gold and silver from 15% to 6%. The duty on platinum has been set at 6.4%. The reduction in customs duty in gold saw domestic gold prices briefly falling below Rs 70,000 per 10 gm mark. Ever since, it has regained strength and gone past Rs 72,000. However, the 9 percentage points cut in import duty may see a surge in gold imports in future.