What Budget 2024-25 Means For You

Finance Minister Nirmala Sitharaman announced a few changes in the new tax regime, while leaving the old one untouched. The government also increased taxes on long-term capital gains. We decode what the Budget means for you

When finance minister Nirmala Sitharaman reached Parliament with her red folder, which she has been carrying since 2019 when she presented her first Budget, and departed from using the traditional suitcase that other FMs carried before her, individuals waited with bated breath for substantial tax relief on salaries and investments.

That’s because the new tax regime doesn’t offer benefits other than the standard deduction, and the popular Section 80C benefits under the Income-tax Act, 1961, hasn’t seen the limit increased since 2014. Also, the introduction of long-term capital gains (LTCG) tax of 10 per cent in Budget 2018 has been upsetting investors, who did not have to pay this tax since 2004 when LTCG tax was removed though securities transaction tax (STT) was levied on the gains. None of the two expectations saw fruition as Sitharaman had some other plans.

The Budget didn’t fulfil expectations and doesn’t offer a lot of benefits to the salaried class, but some of the measures may simplify taxpayers’ lives in the long term. Let’s look at the major announcements in detail and how they affect your money life.

Personal Tax

Slab Rates And Deduction: Sitharaman hasn’t tinkered with the slab rates of the old tax regime for the last seven years. On the other hand, the new tax regime slab rates have been changed once, in 2023. This year too she has slightly tinkered with the slab rates in the new regime, while keeping the old tax regime unchanged (See Income Tax Slabs).

She has also increased the standard deduction from Rs 50,000 to Rs 75,000 for salaried taxpayers in the new tax regime, but not for the old regime for which it stays at Rs 50,000.

Another change that she announced was meant for the new tax regime only. She increased the deduction on family pension from Rs 15,000 to Rs 25,000. Family pension is payable to the family when a government servant dies, subject to certain conditions.

“As a result of these changes, a salaried employee in the new tax regime stands to save up to Rs 17,500 in income tax,” Sitharaman said in her Budget Speech.

TDS Relief: Sitharaman has proposed to bring down  the rate on tax deducted at source (TDS)  from 5 per cent to 2 per cent for certain categories that will benefit the common man. These include payment in respect of life and health insurance policy, payment of rent by an individual or Hindu Undivided Family (HUF), payments relating to commission or brokerage and others under various parts of Section 194.

Moreover, credit of tax collected at source (TCS) is proposed to be given on TDS deducted on salary. TDS on salary is deducted on the basis of an employee’s actual tax liability. But employees have to pay TCS on other transactions, such as when they buy a car or send money outside India under LRS and so on. Let’s understand this with an example.

Says Kunal Savani, partner, Cyril Amarchand Mangaldas, a law firm: “Earlier, such TCS paid was not considered by the employer, and the employee had to claim it as a credit or refund while filing their tax returns. The proposed amendments will allow employers to take into account such TCS paid by the employee while computing the average rate on which TDS is to be deducted on salary.” He explains with an example: If the tax payable by employee ‘A’ on his salary during the year is Rs 1.20 lakh, TDS on salary would have been deducted at Rs 10,000 per month. However, if the employee has already deposited TCS of Rs 36,000 on some purchases during the year, TDS on his salary will reduce to Rs 84,000 annually (or Rs 7,000 per month). This will mean more cash flow for the employee and reduce compliance for the government, which would have had to refund the extra tax collected at the end of the return filing process.

Sitharaman also proposed to decriminalise the delay in the payment of TDS up to the due date of filing statement and provide a standard operating procedure for TDS defaults and simplify and rationalise the compounding guidelines for such offences.

Says Savani, “At present, failure to deposit TDS can lead to a jail term of up to seven years. Generally, TDS needs to be deposited on or before the 7th of the month following the month in which TDS is deducted. Now, the government proposes respite from initiating criminal proceedings if TDS is deposited any time before the due date of filing TDS return. TDS return is filed quarterly, and thus, taxpayers get more time to deposit it.” However, interest and penalties on delayed deposits will continue to apply.

Rental Income Change: The proposal on rental income could lead to higher tax outflow for homeowners who have income from house property. The move is mainly meant to curb misreporting.

Sitharaman said in her Budget Speech: “It has been observed that some taxpayers are reporting their rental income generated by letting out their house property, under the head ‘Profits and gains of business or profession’ in place of the head ‘Income from house property’. Accordingly, they are reducing their tax liability by showing house property income under the wrong head of income.” From April 1, 2025, this income will have to be reported under the head, “income from house property”.

“This change aims to prevent tax reductions through incorrect classification and will apply to the assessment year 2025-26 and onwards,” says Abhishek Soni, CEO, Tax2Win, an income tax portal.

This move is also expected to reduce litigation. “Taxpayers often prefer to classify rental income under ‘business and profession’ to claim all business-related expenses, while tax authorities argue it should be taxed as ‘income from house property’, allowing only a standard 30 per cent deduction and interest deductions under Sections 24(a) and 24(b). This had led to numerous litigations,” says Rahul Singh, senior manager, Taxmann, tax and corporate advisor.

Simplification: The other major measure the government proposed is the simplification of the tax processes, including tax rates, filing, reassessment, litigation and so on. “We will continue our efforts to simplify taxes, improve taxpayer services, provide tax certainty and reduce litigation while enhancing revenues for funding the development and welfare schemes of the government,” Sitharaman said in her Budget Speech.

The biggest announcement that came in this regard is that the government proposes to review the Income-tax Act, 1961, comprehensively, in the next six months. It may be noted that the complexity in the wording of the law, currently, leads to various interpretations in various cases, especially where there is a dispute. The purpose of the review is to ensure that the Act becomes “concise, lucid, easy to read and understand” to “reduce disputes and litigation”.

Reduction in Litigation: Sitharaman emphasised that the government will also make a concerted effort to reduce litigation related to tax disputes.

There are two measures that promise to reduce litigations and disputes. First, Sitharaman has proposed that a case will be reopened for reassessment after three years from the end of the assessment year (AY) only if the income in question is Rs 50 lakh or more. This will drastically bring down the number of disputes, as several cases, involving small amounts, also take a long time for resolution. Says Rohinton Sidhwa, partner, Deloitte India, “This prevents the cycle of litigation from being perpetuated as the income tax department will otherwise mechanically appeal every case it loses at lower level forums.”

For amounts more than Rs 50 lakh, the upper limit has been restricted to five years. At present, the limit for these cases is 10 years. “Reduction in the time limit for reopening past assessment from 10 years to five years will provide certainty to the taxpayers for past periods, thereby enabling ease of doing business,” says Savani.

Even in search cases, a time limit of six years before the year of search, as against the existing time limit of 10 years has been proposed.

Second, Sitharaman has also brought back the “Vivad Se Vishwas Scheme”, which was first introduced in Budget 2020. “VSV 2024 is similar to VSV 2020 and is meant to cut litigation. It’s a new scheme and requires taxpayers to concede cases by depositing a lower amount of tax, interest or penalty than originally computed,” says Sidhwa.

Investment

While LTCG tax on listed entities has gone up from 10 per cent to 12.5 per cent, short-term capital gains (STCG) tax has gone up from 15 per cent to 20 per cent. According to the Budget document, “Listed financial assets held for more than a year will be classified as long-term, while unlisted financial assets and all non-financial assets will have to be held for at least two years to be classified as long-term. Unlisted bonds and debentures, debt mutual funds and market-linked debentures, irrespective of their holding period, however, will attract tax on capital gains at applicable rates.”

Shares: Capital gains tax has been increased by a sizeable amount for listed shares. While the culture of investing in the market has increased in India, the additional tax burden is a dampener, especially for those entering the equity markets for the first time. However, the good news is that the tax-free portion of profits from stocks has been increased from Rs 1 lakh to Rs 1.25 lakh for investments held for at least one year.

The increase in the STCG tax rate, though, may discourage people from switching too soon, and may put a spanner on trading activities that the market regulator has been cautioning against when it comes to retail investors. Exiting market investments before one year gives rise to STCG tax liability. The proposal to increase STT on futures and options (F&O) to 0.02 per cent and 0.1 per cent, respectively, may also help curb trading in F&Os to some extent.

Says Suresh Soni, CEO, Baroda BNP Paribas MF: “The rationalisation of the capital gains tax structure was somewhat anticipated by the markets and other stakeholders. These measures are an attempt by the government to cool down the increasing retail interest in the equity derivatives markets, a concern voiced by multiple regulators.”

It may be noted that capital markets regulator, the Securities and Exchange Board of India (Sebi) has conducted a study on intra-day trading, which has given some eye-opening results. It said that more than 70 per cent of individual intra-day traders in the equity cash segment have incurred losses in FY 2022-23. Showcasing the contrast, the study also found that there is a surge of over 300 per cent in the number of individual traders participating in intra-day trading in the equity cash segment in the same period compared to FY 2018-19.

Mutual Funds: The Finance Act, 2023 introduced Section 50AA, which redefined the treatment of capital gains tax on mutual funds. It categorised mutual funds into equity-oriented and non-equity or “Specified Mutual Fund” categories. As per the definition, the special MF category included debt-oriented funds, fund of funds (FoFs), gold funds and gold exchange-traded funds (ETFs), among others. Budget 2024 has changed its definition, which ensures that categories such as FoFs, gold funds and gold ETFs will stand to gain.

Let’s understand the change. The Finance Act of 2023 stated that the gains on “Specified Mutual Fund” shall be deemed as STCG, irrespective of the period of holding. The requirement of investment of not more than 35 per cent in equity shares impacted funds like gold funds and gold ETFs which are not debt-oriented, but invest below 35 per cent  in equity. But there is ambiguity in the case of equity-oriented domestic FoFs, wherein the underlying funds invest in other instruments. For instance, domestic equity FoFs invest in units of other equity funds, while gold FoFs invest in the units of gold ETFs and so on.

The Budget 2024 document, therefore, saw “a need to redefine the term ‘Specified Mutual Funds’ for the purposes of Section 50AA, to provide clarity regarding the proportion of investment being made in terms of debt and money market instruments, and also to clarify the investment requirements in the case of FoFs.”

According to the new definition, it is a mutual fund “which invests more than 65 per cent of its total proceeds in debt and money market instruments or is a fund which invests 65 per cent or more of its total proceeds in units of a fund which invest more than 65 per cent of its total proceeds in debt and money market instruments”.

This means that predominantly debt-oriented funds will come under the ambit of STCG taxation for the specified holding period, beyond which the gains will be taxed at LTCG rates. In effect, ETFs, gold MFs, gold ETFs and domestic FoFs, which were taxed like debt funds, will now enjoy equity taxation of 12.5 per cent if held for more than 12 months. However, international funds will need to be held for 24 months to enjoy LTCG tax.

Says BNP Paribas MF’s Soni, “The changes to the capital gains taxes will lead to an increase in the tax rates for equity and equity MFs. However, funds in other categories like gold and international equity would benefit from the comparatively favourable rates and holding periods.”

Real Estate: The Budget removed indexation benefits on the sale of property while reducing LTCG tax from 20 per cent to 12.5 per cent.

Indexation benefit allowed sellers to adjust the property’s cost for inflation, effectively lowering their taxable profits. Now, investors will have to pay capital gains tax based solely on the difference between the purchase and selling prices, without any inflation adjustment. The new rules are effective from July 23, 2024.

We did the numbers and found out that even with a lower LTCG tax rate, the removal of the indexation benefit will be a disadvantage for sellers in some cases (see LTCG Tax On Property Sale). LTCG is applicable on real estate after a period of 10 years.

But some factors may change the results, say experts. Says Hemal Mehta, partner, Deloitte India: “Indexation was designed to give the benefits to the seller on the time value of money. When the same is removed, the home buyer selling a residential house and buying another will need to make sure two things (I) transaction value is less than Rs 10 crore and (ii) the seller will have comfort in investing a larger share of sale proceeds in another residential house. Removal of indexation will result in higher capital gains and resultantly higher amounts of tax at 12.5 per cent vis-a-vis 20 per cent post-indexation benefit. One will need to weigh the pros and cons of each deal.”

“The overall effect depends on several factors, such as the rate of appreciation in asset value, inflation, and tenure of holding the asset. It will be interesting to see how buyers, sellers, and developers adjust to the new tax rules,” says Shrinivas Rao, FRICS, CEO, Vestian, International Property Consultants.

“The impact of these proposed changes can vary, depending on circumstances. For instance, if you bought a house in 2014 for Rs 5 lakh and sold it in 2024 for Rs 7 lakh, you would have a long-term capital loss if indexation benefits were allowed. However, under the new budget proposals, you would need to pay tax at 12.5 per cent on the Rs 2 lakh gain,” says Singh from Taxmann.

“There may be situations where homebuyers will benefit from the removal of the indexation benefit. This would occur when the property price significantly increases over a short period. In this case, tax liability would be lower under the new Budget proposals,” adds Singh.

Reits and InvITs: Investment in units of real estate investment trusts (Reits) and infrastructure investment trusts (InvITs) have been made more attractive. The long-term holding period has come down to bring these assets on a par with listed equity shares. “Thus units of listed business trust will now be at par with listed equity shares at 12 months instead of earlier 36 months,” the document noted.

Says Vimal Nadar, senior director and head of research at real estate company Colliers India, “Retail investor participation in REITs and InvITs will receive a boost from the parity in treatment with other listed equity classes (in terms of holding period for LTCG). Also, the increase in the capital gains exemption limit to Rs 1.25 lakh is a positive.”

Subahoo Chordia, head, real assets strategy, Edelweiss Alternatives, feels investors looking at risk-adjusted returns will be attracted to these instruments.

Gold: The Budget reduced the customs duty on gold and silver from 15 per cent to 6 per cent, which may lead to a decline in prices and increase in demand. Anyway, the festive season is around the corner.

The cut in gold import duty will promote the manufacturing of gold and silver jewellery and prevent smuggling, said Union Minister of Commerce and Industry Piyush Goyal, reacting to the Budget. He added that the decision will reduce the price disparity between domestic and international markets.

Says Hareesh V., head of commodities at Geojit Financial Services, “The reduction in customs duty may lead to a decline in domestic prices and lift demand. The existing 15 per cent duty comprises 10 per cent of basic customs duty and 5 per cent as agricultural infrastructure development cess.” The total import duty is down, including cess.

Insurance and NPS

Insurance: TDS on life insurance payouts is to be reduced from 5 per cent to 2 per cent. TDS on the payment of bonuses on policies and funds other than the amount not included in the total income under Section 10D will also be reduced to 2 per cent, effective October 1, 2024.

Simply put, the policyholder will receive a larger payout from their life insurance policies when they mature. Says Krishan Mishra, CEO, FPSB India: “Policyholders will gain a higher value from their term policies, while those dependent on income from annuity will gain the most from this reduction in TDS.”

NPS: Two major announcements were made regarding the National Pension System (NPS), indicating the government’s seriousness in strengthening the retirement ecosystem in India through NPS.

The first was introducing a new scheme called NPS Vatsalya, which will allow parents to open an account and contribute on their minor children’s behalf. The account can then be transferred to the children, once they turn 18. Says Sriram Iyer, CEO, HDFC Pension: “NPS Vatsalya is a notable innovation. It will allow parents or guardians to contribute to a child’s pension from birth, ensuring a strong foundation for future retirement savings through compounded returns.”

Considering India’s growing elderly population, pension reforms have been long overdue, however, how effective NPS Vatsalya will be is something that remains to be seen, given that a lot of Indians are not saving for their own retirement.

Another shortcoming is the withdrawal option due to which parents will not be able to use the scheme to fund their children.

Says Mrin Agarwal, a Sebi-registered investment advisor (Sebi-RIA), “The NPS Vatsalya scheme needs to have good withdrawal options versus the existing rules.” At present, NPS allows partial withdrawal only after three years. She also feels to cater to the retirement goal, “the limit of Rs 7.5 lakh on aggregate of contributions made by an employer to recognised provident fund, NPS and an approved superannuation fund should have been increased.”

The second announcement was the expansion in the deduction limit for NPS. “Deduction of expenditure by employers towards NPS is proposed to be increased from 10 to 14 per cent of the employee’s salary. Similarly, deduction of this expenditure up to 14 per cent of salary from the income of employees in the private sector, public sector banks and undertakings, opting for the new tax regime, is proposed to be provided,” Sitharaman said.

“This favours only the salaried. Inclusion of Section 80CCD 1(B) in new tax regime would help self-employed to also avail of tax deduction and improve the attractiveness of NPS,” says Agarwal.

Budget 2024-25 offered almost nothing to taxpayers. As such, it is up to the taxpayers now to make the best of the available provisions to save for their long-term goals. 

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