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Budget 2024 Insights: Decoding budget for individual taxpayers
In the eighth episode of our exclusive post-budget 2024 series, ’Budget Insights’, our India Tax Partner and Leader, People Advisory Services, Sonu Iyer, provides an in-depth analysis of this year's budget proposals for individual taxpayers. She focuses on how the new tax regime, changes in capital gains tax, and updates to Securities Transaction Tax will impact taxpayers. Join us as we explore the implications of these budget changes on personal finance, investments, and long-term financial planning.
For your convenience, a full text transcript of this podcast is available on the link below:
Pallavi: Welcome to "Budget Insights", where we explore the dynamics of India's economic changes. I am Pallavi you host for today, we are joined by Sonu Iyer, Tax Partner at EY India. With over 30years of experience in tax advisory and policy analysis, Sonu brings a wealth of knowledge in individual taxation, as well as regulatory compliance. Let us find out about the budget proposals that will impact individual taxpayers.
Sonu, Thank you for joining us this episode – it is great to have you here again . We look forward to your Insights on how the budget changes affect our listeners' personal finance.
Sonu Iyer: Thanks, Pallavi. It is my pleasure to be back again with you for discussion on the budget proposals that impact individual taxation and personal finance.
Pallavi: To start off, could you please outline the key changes in the new tax regime? How the new tax slabs will affect individual financial planning. Additionally, could you discuss the benefits and long-term effects of the increased standard deduction on personal spending and savings?
Sonu Iyer: Thanks, Pallavi. So, I think when you were talking about expectations from the budget, one of the things you were talking about is that the finance minister has to think of some ways and means to put more personal disposable income in the hands of the taxpayers. We need more money in the hands of people to be able to spend, invest and save to keep the macroeconomic markers in shape.
There were expectations that there would be an increase in the maximum amount exempted from tax in the new tax regime, but that may not have happened. But what has happened, let us talk about that. So, there is a widening of slabs that has happened in the new tax regime. And all of these measures are being done to make the new tax regime more attractive.
So, when I talk about widening of tax slab, what we have seen is the first slab that is up to 3 lakhs, there is no tax, as in the current tax regime and in the new proposed tax regime there is no change. But the slabs that then follow 3 to 7 lakhs has become wider. It was earlier 3 to 6 lakhs and now it is 3 to 7 lakhs and the tax rate is the 5%. So, the cascade impact is that there is an increase in one lakh of every slab that follows. If I were to call out, 0 to 3 lakhs – nil; 3 to 7 lakhs – 5%; 7 to 10 lakhs – 10%; 10 to 12 lakhs – 15%; 12 to 15 lakh – at 20% and about 15 lakhs – taxes are 30%.
The net impact of the slab would mean that someone who has income in the range of 15,75,000, they will be saving close to INR17,500 before adding on CESS and surcharge impact. So, there is more money ultimately in the hands of the taxpayers because of the widening of the tax slabs. An expected change for salary income earners’ standard deduction has gone up from INR50,000 to INR75,000, which means a resident salary income tax payer effectively can have income up to INR7,75,000 and pay no tax because of the tax rebate of 25,000 plus the increase in standard deduction.
An individual with total income of INR7,75,000 will not pay any tax. On the standard deduction, the Finance Minister has kept in mind also the retired employee who are getting pension. So in that case, the family pension standard deduction is increased from 15,000 to 25,000. That is the change in the tax slab as well as the increase in the standard deduction.
And as I said, this means more money in the hands of the individual taxpayers. And this will have its own cascading impact of being able to spend more and save more.
Pallavi: Thank you, Sonu. Now, pivoting towards the capital gains, the budget has brought immediate changes to the taxation of Long-Term Capital Gains And Short-Term Capital Gains. How do you believe that this will affect investors and what should they be aware of in light of these changes?
Sonu Iyer: Thanks Pallavi, That is a big one. We did expect some sort of overhauling of capital gains tax regime because in the current capital gains tax regime, we see variances in holding periods, various treatment for tax rate purposes, so that was much needed and much expected. But some surprises have also come up. Let us talk about what is changing. 1. On the holding period— In the current law, we have holding periods varying from 12 months for listed equity shares in equity oriented mutual funds unit of a business trust. We have a period of 24 months for assets like immovable property. For unlisted equity shares, for assets like gold, etc., the holding period is 36 months for these assets to qualify as long term capital gains.
What has been done is a very welcome move, which is rationalization. So, you have a holding period of 12 months in case of listed securities and equity oriented mutual funds in units of a business trust and a period of 24 months is holding periods for all other assets. So, the consistency, stability, clarity, and simplification are very welcome.
Now let us look at the changes in terms of rate of tax applicable to listed securities or listed equity shares or equity units of equity oriented mutual fund. If the holding period is less than 12 months. Currently, the tax rate that is applicable on these short term capital gains is 15%. Now, what is being proposed in the budget is a hike of 5%, which means that the short term capital gains tax rate applicable on sale of equity shares, units of equity oriented mutual funds and units of business trusts, which are held for less than 12 months, will now be taxed at 20%.
So, some of the benefit of the widening of the slab and the revenue losses are being mitigated through the hike in the tax rate for short term capital gains. The justification we have heard from the government and post the budget and post-budget conferences is that typically high net worth individuals were benefiting from this favorable regime for short term capital gains tax, and therefore, it should not have a far-reaching impact.
All other short term capital gains, as is the case today, will continue to be taxed at the slab rate. Then moving on to a big change we are talking about, long term capital gains tax currently varies from 10% to 20%. Now under the new regime, what is being proposed?
All long term capital gains will be taxed at 1.5%. So it does mean that long term capital gains in case of sale of equity shares or equity oriented mutual funds and etc., which were currently taxed at 10% effective 23 July 24, will now be taxed at 12.5%, although there is a marginal increase in the threshold exemption, which today stands at 1 lakh rupees, that will now be increased to 1.25 lakh rupees.
So the threshold exemption has gone up, but the rate of tax has increased from 10% to 12.5%. The rate of 12.5% will also apply to the sale of immovable property, gold, or any other asset. So that rate will be consistently applied. To that extent, the consistency in the rate of tax is very welcome. We talked about changes in the holding period.
We have spoken about changes in the tax rates for both short term capital gains and long term capital gains. One big change which has come as a surprise is the withdrawal of indexation benefit. Now what is indexation? Indexation is typically adjustment in the cost to factor in the increase in the cost because of inflation. So it is an inflationary adjustment that is made to a cost of acquisition.
So that benefit typically used to be useful for people who acquired assets long ago. The cost could be made current to present day by adjusting for inflationary factor. And in fact, the income tax department releases the cost of inflation index every year for the taxpayers to utilize and be able to index the cost to the current time.
This withdrawal of indexation will have consequences, especially if you are selling property and if you are selling property, which you may have acquired long ago. Depending on each specific fact, the loss of this indexation benefit may result in higher capital gains. And we will talk more about it later.
This is a major change in the capital gains tax regime, that indexation benefit is withdrawn. For those of you who want to know where on the indexation benefit was available, it was available in case of property, as I told you, it was for gold. Also, you could index it to the cost of acquisition. It was also available in case of unlisted shares. It was available for debt oriented mutual funds that were acquired prior to April 23. The only place it was not available was in case of equity shares listed equity shares, bonds and debentures and for capital gains tax that the nonresidents had to pay if they were using the concessional rate of 10%.
The impact will have to be seen in each individual fact pattern. Whether the loss of indexation benefit is offset by the fact of long term capital gains tax rate having come down in some cases, some categories of assets from 20% to 12.5%. So that is from a perspective of what changes have been made to the capital gains tax regime. These are the changes now how this will impact an investor? So, I firmly believe that typically an investor going into the market is doing so to be able to gain from the increase in the value of the investments, right? Tax is incidental. So, I do not see this impacting the investors in the long term. We have already got used to the idea of 10% long term capital gains on sale of equity shares. Prior to that, it was zero. So the fact is that migration has already happened. This 10% to 12.5% tax should not have a major impact.
But I think the ask would be to have stable income tax rates as far as the long-term capital gains tax regime is concerned. Given that there is a review of the Income Tax Act coming up, I hope there's no further tinkering with the rates.
From a stability standpoint, which the finance minister seeks to bring in through the budget, we should see these rates prevail for a long period of time.
Pallavi: Thank you. Sonu. In this year's budget, there has been a significant shift regarding the indexation benefit on the sale of immovable property. Could you explain how the removal of indexation benefits will impact individuals who are selling their property?
Sonu: Yeah, we just spoke about it, Pallavi, but to summarize, specifically on the sale of immovable property: the tax rate is changing from 20% to 12.5%. If the property has been held for more than two years, the current law imposes a 20% tax, which will now be 12.5%.
We discussed that the withdrawal of the indexation benefit can turn what was previously a capital loss into a capital gain, depending on each individual's specific circumstances, such as the cost of the asset and when it was purchased.
An important clarification to keep in mind is that for assets acquired before April 2001, you can still choose the fair market value as of April 1, 2001, or the cost of acquisition, whichever is higher.
So that will be considered as the cost of acquisition. To that extent, the indexation benefit up to 1 April 2001 is protected and will still be available. We are talking about the loss of inflation index really after 2001— so, 1 April 2001 to date to the date of transaction will be the loss of indexation benefit.
But again, it will be fact-specific, and you will have to do the calculations. I also want to mention that because there is no indexation benefit available when you compute your long-term capital gains on the sale of immovable property, you will need to invest the absolute amount of capital gains to benefit from section 54. This means the capital gains must be invested in the purchase of a residential property.
Previously, you only needed to invest the indexed capital gains, which were the gains computed after indexation, to get the tax benefit. Now, you will have to invest the total amount of capital gains, which is the consideration minus the cost of acquisition of the asset. You also need to be mindful of the overall cap of ten crores for section 54 and the cap of 50 lakhs for section 54EC.
The amount of capital gains to be invested to get these benefits must be carefully considered because you no longer have the benefit of indexation. That was what I wanted to add to the earlier response about indexation benefits not being available on the sale of immovable property.
Pallavi: Moving on. the proposed increase in securities transaction tax rate has been a topic of much discussion. Could you discuss the rationale behind this decision, as presented in the budget and its potential impact on the capital markets?
Sonu Iyer: Right. We all know about the buoyancy in the stock exchanges. And I think the finance minister is very clearly looking to offset some of the revenue loss or various outlays that are being made in the schemes for development and employment generation through the hike in the securities Transaction Tax.
And, interestingly, the economic survey that came a day before the budget proposals also talked about the fact that we are seeing the retail investors getting very active into the derivatives market. In fact, very clearly, they said we need to be able to save such young investors that they should not be incurring loss and be put off the market forever.
And that will be a loss to the economy, as investors may not want to continue on stock exchanges due to the incurred losses. They are citing global experience when dealing in derivatives market, etc., which gave us an indication that something was coming for futures and options.
So, we have seen a hike in the securities transaction tax for Futures and Options (F&O). So it is proposed to increase the rate of securities transaction tax on sale of an option securities from the current 0.0625% to 0.1% of the option premium, and on sale of futures insecurities from 0.0125% to 0.02% of the price at which futures are traded. Now, it may seem a decimal here and there but this will mean a significant collection, given the current volume of transactions that we have seen.
If it is intended to offset some revenue loss, this is a good source of additional revenue for the government. If it is also intended, based on the Economic Survey, to influence behavior of investors and to discourage them from getting active on futures and options, that purpose can also be served.
The STT is a safe way for the government to have collected additional tax and also influence behavior of retail investors getting into the derivatives market.
Pallavi: Thank you, Sonu. Share buybacks were mentioned in the budget speech. Could you clarify for our listeners what a share buyback is and why companies might opt for it? And also discuss the implications of new budget provisions on share buybacks for both companies and shareholders.
Sonu Iyer: So, I think the budget proposal is plugging a gap they see as an anti-avoidance measure. If you look at share buybacks, typically this is a method for companies to distribute their accumulated results, similar to dividends. And the government is actually calling that out and saying that if it is similar to dividends, then it should be treated in the same manner. From an equity standpoint, what they are doing now is and this will effectively mean that currently when the share buyback transaction was happening, the company was being taxed on the buyback shares from the shareholders at some 20%, while the recipient of the income for transfer of these shares was not paying anything at all. If the government is looking at it from an equity standpoint, anyone who is getting income on the sale of shares or receiving any form of dividend should pay tax.
So effectively, this is what is being sought to be plugged. When you hear the budget speech, it is very clearly stating that this seems to be the right thing to do. What is now being proposed is that any sum paid by a domestic company for the purchase of its own shares will be treated as dividend in the hands of shareholders who receive payment from such buyback of shares, and shall be chargeable to income tax at the regular slab rate.
There will be no deduction for expenses available against this dividend income, so there will be no cost of acquisition. It is deemed dividend with no expense deduction and no cost of acquisition index. The cost of acquisition will be treated like a capital loss, which can be offset against any capital gains on the sale of these shares in the future.
So for share buyback, I do not think we will see many more transactions on share buyback effectively that is completely plugged with this.
Pallavi: Thank you, Sonu. The finance minister also outlined the changes in the tax collected at source regime. If you can elaborate on these changes and discuss the impact these divisions will have on the business environment as well as the taxation process for various stakeholders.
Sonu Iyer: For TCS, one of the big asks from people, especially salaried income earners, was that the tax they had been subject to for remittances overseas needs to be offset against the tax withholding done on their salary payments.
The government has actually relented and no tax suffered by the income earners can be offset against the withholding tax. This will particularly benefit expatriate employees working in India who were suffering due to TCS collected on remittances by the bank. This TCS can now be used to offset withholding tax liability on salary, which is a positive measure.
There is also introduction of TCS on purchase of luxury goods aiming to create equity. The thing is, there are a lot of high net worth individuals that are spending a lot of money on luxury. So, for that, any purchase of 10 lakhs or more will be subject to a 1% TCS.
So, that is on tax collection at source, which is actually is adjustable against the total tax liability of the individual. But typically the individual would have to wait until filing the tax return to be able to offset the tax collected at source. This obviously will also lead to widening of the tax base when you are introducing tax on various transactions. And in a way, the government is also amplifying the message that we are tracking all expenditure.
HNIs’ spending is being tracked by the government, and now there is a 1% TCS in line with the TCS introduced earlier on foreign travel and international credit cards. The TCS on international travel cards was rolled back, but it now applies to preloaded foreign exchange currency cards. We can expect to see more TCS measures on various transactions. Once the government has established the tax base, these measures will likely become more rationalized. That is on TCS, Pallavi.
Pallavi: Thank you. Sonu. before we let you go, we are very eager to hear your summary on tax rationalization measures introduced by the finance ministers budget speech. could you explain the resolution framework designed to streamline the tax dispute? And also, what impact do you foresee with the 'Vivad se Vishwas', which was initiative on resolving pending tax cases?
Sonu Iyer: Yeah Pallavi. The finance minister’s opening lines about tabling the direct tax proposals to simplify tax are evident from the proposals she put forth, particularly regarding dispute resolution. We are seeing provisions around the time limit for issuing notices for reassessment, which is a welcome change, bringing it down to three years. There is also a monetary limit set for initiating reassessment.
There is the introduction of the 'Vivad se Vishwas' scheme, which is a dispute resolution scheme addressing pending cases. The government is revising this scheme to handle matters still before them. The biggest change is a comprehensive review of the current Income Tax Act, which has become cumbersome over the years due to amendments.
An end date is specified, stating that within the next six months, a comprehensive review of the Income Tax Act should be completed. There is also a rationalization of TDS rates, which is welcome, as well as the rationalization of the capital gains tax regime. The credit of tax being permitted to offset withholding tax liability and the time limit for issuing notices are also positive rationalization measures. All these changes aim to achieve stability, predictability, and simplification of the tax regime.
Pallavi: Thank you, Sonu. So now on that note, we come to the end of this conversation. Thank you again, once again for joining us and sharing all your post-budget Insights, impact on individuals and personal finance.
Sonu Iyer: Many thanks for having me. Thank you to all our listeners for joining us on the Budget Insight. We hope this episode has shed light on the new income tax regime and its implications for you. For more Insights and expert advice, stay tuned to our series.
Until next time, keep your finances in check and your future secure.
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