The Finance Minister announced several changes in the 2024 Union Budget that are intended to streamline and rationalize certain aspects of taxation, along with improving the ease of doing business in India. These measures will help promote overall economic growth, and encourage investments in different sectors of the economy, with a view to increase employment growth and increase disposable income in the hands of individuals. Here we break down some of the key changes and their impact.
Simplification and Rationalization of Capital Gains
Where previously there were multiple definitions for long term and short term holding periods for different asset classes, along with different applicable tax rates, Budget 2024 announced a more simplified set of rules.
Listed financial assets (eg.: listed equity shares and equity Mutual Fund units) held for more than 1 year will be classified as long term, and if held for less than 1 year would be classified as short term.
Unlisted financial assets (eg.: unlisted equity shares) and all non-financial assets (eg.: real estate) will have to be held for at least 2 years to be classified as long-term, and if held for less than 2 years would be classified as short term.
Understanding these new distinctions will help investors with effective tax planning and maximizing investment returns.
As you can see in the table below, the long term capital gains tax across most categories of financial and non-financial assets has been standardized to 12.5% (with no indexation benefit), while the short term capital gains would similarly be taxed uniformly at 20% for most categories. TDS deductions for NRIs will change accordingly from July 23, 2024 onwards, as tabulated below.
As a reprieve to retail investors, the Budget also provides for an increase in the annual exemption of long term capital gains from listed equity shares and equity Mutual Fund units to Rs. 1.25 Lakhs per financial year. This is intended to offset the increase in tax from 10% to 12.5%.
Synopsis of the Tax Changes in Union Budget 2024
Before Union Budget 2024 | After Union Budget 2024 | |||
Short-Term Capital Gain Holding Period and Tax | Long-Term Capital Gain Holding Period and Tax | Short-Term Capital Gain Holding Period and Tax | Long-Term Capital Gain Holding Period and Tax | |
Listed stocks and equity mutual funds (no change in holding period, but change in taxation) | <12 months |
| <12 months | >=12 months |
Debt-oriented mutual funds (no change in holding period, and no change in taxation) | NA | NA Taxed as per slab rate | NA Taxed as per slab rate | NA Taxed as per slab rate |
Listed Bonds (no change in holding period, but change in taxation) | <12 months Taxed as per slab rate | >=12 months 10% | <12 months 20% | >=12 months 12.5% |
ReITs/ InvITs (with less than 90% exposure in equity ETFs) (change in holding period, and change in taxation) | <36 months | >=36 months | <12 months | >=12 months |
Equity FOFs/ Gold and Silver ETFs/ Gold Funds/ Overseas FOFs (change in holding period, and change in taxation) | NA Taxed as per slab rate | NA Taxed as per slab rate | <12 months 20% | >=12 months 12.5% |
Physical Real Estate (no change in holding period, but change in taxation) | <24 months | >=24 months 20% with indexation benefit | <24 months | >=24 months 12.5% with no indexation benefit |
Unlisted Bonds (no change in holding period, and no change in taxation) | <24 months | >=24 months Taxed as per slab rate | <24 months Taxed as per slab rate | >= 24 months Taxed as per slab rate |
Physical Gold (change in holding period, and change in taxation) | <36 months | >=36 months 20% with indexation benefit | <24 months Taxed as per slab rate | >= 24 months 12.5% with no indexation benefit |
Unlisted stocks/ Foreign Equity/Debt (no change in holding period, but change in taxation) | <24 months | >=24 months 20% with indexation benefit | <24 months Taxed as per slab rate | >= 24 months 12.5% with no indexation benefit |
Accordingly, the key applicable TDS rates for NRIs will now be as follows:
Previously | Now | |
TDS: Sale of listed equity shares and equity Mutual Fund units | 10% for long term holding 15% for short term (<12 months) | 12.5% for long term holding 20% for short term (<12 months) |
TDS: Rental income | 30% | 30% |
TDS: Sale of property | 20% for long term holding
30% for short term (<24 months) | 12.5% for long term holding 30% for short term (<24 months) |
Impact:
Taken together, these measures will significantly simplify tax planning for large sections of the taxpaying population, at the cost of increasing the tax burden for some.
The increase in long term capital gains tax to 12.5% coupled with the increase in the exemption limit up to Rs 1.25 Lakhs will help protect the interests of long term retail investors, while increasing the overall tax collections for the government through this channel.
The increase in short term capital gains tax to 20% is also intended to target increased tax collection from the short term trading and speculation markets, while avoiding hitting the purse of long term investors.
In the same direction, the Securities Transaction Tax (STT) levied on Futures and Options (F&O) has also been hiked from 0.0125% to 0.02% and 0.0625% to 0.1%, respectively. This move intends to increase the cost of speculative trading in the F&O markets, along with targeting increased tax collections. Although the percentage changes are small, they add up to significant sums because of the high trading volumes in these segments.
The change in long term capital gains taxation for real estate is one of the most significant announcements and will likely increase the tax burden on the sale of property. Although the tax rate has come down from 20% to 12.5%, the removal of the indexation benefit means that gains will now be calculated based on the actual purchase price of the property, rather than the indexed price as was done till now.
Other key changes impacting “Ease of Doing Business”:
The Budget also announced a host of other key changes impacting the business and startup communities. These are intended to improve the ease of doing business in India, and thereby increase the availability of employment opportunities for India’s youth.
Changes from 23-July-2024:
Previously | Now | |
Angel Tax | 30% on the price above the Fair Market Value of shares acquired | Abolished i.e. 0% |
Corporate Tax | 40% | 35% |
ESOPs | All foreign ESOPs/assets to be disclosed | Exemption upto Rs 20 lakhs |
TDS for e-commerce | 1% | 0.1% |
1. Abolishment of Angel Tax
The abolishing of Angel Tax across all categories of investors has come as very welcome news for the Indian startup community.
Impact:
The removal of this tax is anticipated to spur the growth of startups as it does not charge any tax on investments above fair market value, and directly frees up significant amounts of capital for startups to invest in growing their business and increasing hiring.
2. Corporate Tax
As an important step towards attracting more foreign direct investment (FDI), the corporate tax rate on foreign companies has been reduced to 35%.
Impact:
Although this move may lower tax collections in the short term, in the medium to long term it is expected to attract greater levels of foreign investment, thereby increasing government revenue as well as employment.
3. ESOPs for MNC Professionals
Moreover, professionals in MNCs who get employee stock option plans (ESOPs) and then invest up to Rs 20 lakh in overseas moveable assets will no longer be subject to criminal prosecution or penalty under the Black Money Act.
Impact:
As India attracts more foreign investment and the setup of an increasing number of Global Capability Centers of MNCs, this move will help such companies offer competitive compensation to hire and retain top talent, and gives these employees more financial flexibility.
4. TDS reduction for e-commerce:
The TDS rate for e-commerce operators has been drastically reduced from 1% to 0.1%.
Impact:
This helps free up a significant chunk of cash flow for e-commerce ecosystem participants to reinvest into their businesses and employees.
Revised Tax Rate Structure under the New Tax Regime
The Finance Minister also announced some important changes to the structure of taxation under the New Tax Regime:
Tax Slab for FY 2023-24 | Tax Rate | Tax Slab for FY 2024-25 | Tax Rate | Change |
Upto ₹ 3 lakh | Nil | Upto ₹ 3 lakh | Nil | No change |
₹ 3 lakh - ₹ 6 lakh | 5% | ₹ 3 lakh - ₹ 7 lakh | 5% | Slab threshold increased by ₹1 lakh |
₹ 6 lakh - ₹ 9 lakh | 10% | ₹ 7 lakh - ₹ 10 lakh | 10% | Slab threshold increased by ₹1 lakh |
₹ 9 lakh - ₹ 12 lakh | 15% | ₹ 10 lakh - ₹ 12 lakh | 15% | Matched with previous slab |
₹ 12 lakh - ₹ 15 lakh | 20% | ₹ 12 lakh - ₹ 15 lakh | 20% | No change |
> 15 lakh | 30% | > 15 lakh | 30% | No change |
Increase in Standard Deduction and Family Pension Deduction:
The standard income deduction under the new tax regime has been raised to Rs 75,000 from Rs 50,000. The deduction for family pensions for pensioners has also been increased to Rs 25,000 from Rs 15,000 earlier.
Impact:
The intent behind these measures is to reduce the tax burden on lower income groups, thereby increasing the amount of savings and disposable income available in their hands. This in turn will help raise consumer spending and provide a boost to the economy.
This progressive type of taxation enables low-earning groups a reprieve while ensuring high-income earners pay a fair amount.
Conclusion
To promote economic development, attract investments, and provide respite for Indians in lower income brackets, the 2024 Union Budget has introduced significant changes in taxation. The actual impact of these changes will become evident with time, and is expected to have a positive influence on India’s growth trajectory.
