Illustration of a citizen paying tax.
| Photo Credit: Getty Images

The 2024-25 Budget is not just an account of receipts and expenditures for the financial year; it also sets the stage for several years in terms of expectations. Taking off from the analysis in the Economic Survey, the Budget identifies priority areas for government intervention. Key among these are employability and employment, and productivity and resilience in agriculture and infrastructure. The expenditure side of the Budget addresses many of these priorities. The proposals on taxes play a limited role in addressing these priorities. This article looks at the rationale behind a few of the tax proposals.

Two kinds of tax proposals

Tax announcements in the Budget can be divided into two parts – proposals to provide incentives for specific sectors and general proposals. The former is largely limited to announcements on changes in customs duties. For each of these announcements, the rationale is to protect domestic industry or encourage competition within it. One driver for this approach seems to be to create “national champions”. Information on the policy framework for determining sectors and activities for such support could provide a predictable policy environment. The Finance Minister’s announcement to undertake a comprehensive review of the rate structure provides comfort in this context.

Budget 2024 |Middle class discontented, real estate sector applauds tax reforms

Regarding the general proposals, two sets pique interest — first, those relating to capital markets and second, those relating to the differences between the old and new tax regimes.

The debate on personal income tax in India has often centred on the number of citizens who file returns and pay taxes. It has been argued that too few people pay taxes in India. Another emerging notion is the impact of growing income inequality on tax collections. A proposal for wealth tax of 2% on billionaires has been offered for discussion in the G20 summit in Brazil. The Economic Survey articulates this concern in terms of differential taxation of capital and labour income. The Budget proposes to address this concern through changes in taxes on capital gains. It proposes increase in both short-term and long-term capital gains. Further, on buyback of shares too, the receipts are now to be taxed in the hands of the recipient as dividend.

High returns in capital markets, especially in the Futures and Options segments, have been flagged as a source of concern by the Reserve Bank of India and the Economic Survey. Apart from the uncertainty faced by retail investors, high returns are likely to induce a shift away from banking to capital markets. The Budget has proposed an increase in securities transaction tax on derivatives transactions. The revised regime on taxation of capital market transactions with all its components is likely to tone down the irrational exuberance in capital markets in the short term. This might be helpful in stabilising the market as a tool for raising resources for real investments.

Old and new tax regimes

Reform programmes of tax regimes have identified broadening of the tax base and elimination or reduction of tax incentives as primary elements, along with rationalisation of the rate structures. The inter-temporal nature of incentive regimes often renders elimination of tax incentives difficult. To address this concern, the government introduced the option of a simplified regime, where taxpayers do not have access to a range of exemptions and concessions with the advantage of a lower rate of tax. They have been offered a choice between the two regimes. It is hoped that over time, the old regime would become redundant.

In order to nudge taxpayers towards the new regime, the Budget introduces a few changes in tax policy. For individual tax payers, the standard deduction in the new regime has been raised from ₹50,000 to ₹75,000. This provision does not apply to the old regime. Similarly, the slabs associated with different income classes in the new regime have been expanded. In corporate income tax as well, there is a proposal to allow higher deduction of Provident Fund contributions by employers opting for the new regime, provided they adopt the National Pension System too.

The Finance Minister mentioned that 58% of corporate tax and over 66% of the returns in personal income tax came from the new regime. These are impressive numbers. There are two alternative numbers to consider. The share of the old regime in total income reported for corporate income tax increased from 38% in 2021-22 to 43% in 2022-23. Further, in the case of personal income tax, the ratio of revenue foregone to total revenue collected in 2021-22 was 24% and reduced only marginally to 23.33% in 2022-23. These numbers suggest, as one would expect, that taxpayers are choosing the lesser of the two taxes in choosing a regime. While it is benevolent of the government to provide such options, it would appear that the voluntary transition to the new regime could be fiscally costly, if repeated nudges in the form of reduced tax liabilities need to be offered. It is possible to argue that a prospective terminal date could be announced for the old regime, with limited options for grandfathering existing incentives. More so since alternative regimes do not simplify the choice architecture: for taxpayers, it is one more decision to consider.

R. Kavita Rao, Director, National Institute of Public Finance and Policy

The Finance Minister had stated in her address that more than two-thirds of the taxpayers had availed the new regime in the previous fiscal year.
| Photo Credit: The Hindu

Altering the structure for taxation of income under the new regime, Finance Minister Nirmala Sitharaman on Tuesday revised the tax slabs whilst retaining the erstwhile corresponding tax rates other than increasing the standard deductions. The present slab of ₹3-6 lakh, that is, the preliminary bracket liable to be taxed, would now be revised upwards to ₹3-7 lakh. However, the corresponding rate of taxation remains unchanged at 5%. No changes were however made for individuals with income of less than ₹3 lakh – who continue to draw no tax liability – the ₹12-15 lakh slab and for incomes exceeding ₹15 lakh.

Ms. Sitharaman held that because of the changes, a salaried employee now stands to save up to ₹17,500 in income taxes.

Budget 2024 LIVE Updates

The standard deduction for salaried employees, enrolled under the next tax regime, too, has been increased to ₹75,000 from the current ₹50,000. Furthermore, she announced an increase in the deduction on family pension for pensioners from ₹15,000 to ₹25,000. The two measures combined, she stated, would provide relief to “about four crore salaried individuals and pensioners.”  

More under new regime 

According to Deepashree Shetty, Partner at BDO India, who follows tax and regulatory services, the rejig in slabs was aimed at providing relief to middle-class taxpayers and to further promote the new tax regime. The Finance Minister had stated in her address that more than two-thirds of the taxpayers had availed the new regime in the previous fiscal year. 

Poorva Prakash, Partner at Deloitte India, who follows personal taxation, explained that the revision in tax slabs combined with increase in standard deduction would be beneficial for salaried employees. It would facilitate savings of about ₹17,500 on an income of ₹15 lakh, she observed. “This is a good amount [the savings] and also serves the primary objective of the new regime to push more disposable income,” she said. 

About the potential need for the revision in tax slabs, the Deloitte partner explained that taxpayers in the new tax regime cannot claim exemptions citing components as house rent allowances (HRAs), among other things. Therefore, the avenue for incentivisation is limited. Thus, the revision is tax slabs was explored in addition to the standard deduction for salaried individuals to spur their disposable income. 

No penalisation for non-reporting of small foreign assets 

Among other significant measures with respect to personal finance, whilst introducing measures to deepen the tax base, the FM proposed that not reporting movable assets of up to ₹20 lakh would not be liable for penalisation. Explaining the context, she stated that Indian professionals working in multinationals get ESOPs (employee stock ownership plan) and invest in social security schemes and other movable assets outside the country. She elaborated that not reporting such small foreign assets invited penal consequences. The introduction of the ₹20-lakh threshold thus proposed to address this paradigm. 

Sumeet Hemkar, Partner at Deloitte India, explained that the intent was not to penalise smaller individuals who may have missed on disclosing for “some less malign or benign reasons”. He added that the focus was instead on individuals with higher value assets overseas who were not making the disclosures by intent. This could be because they did not want certain transactions to be known to the Indian government and thereby reviewed. 

Mr. Hemkar further stated that the threshold would also help loosen the operational burdens emanating from the smaller cases of non-disclosures.

New Delhi:

Standard deduction in the new tax regime will be increased from Rs 50,000 to Rs 75,000, Finance Minister Nirmala Sitharaman said Tuesday as she announced the 2024 Union Budget. 

Ms Sitharaman also announced revisions to tax slabs in the new regime. As a result, the Finance Minister told Parliament, salaried employees can save as much as Rs 17,500 in the new regime.

It will also, she said, provide salaried individuals with higher tax savings and more disposable income.

#Budgest2024: Tax rate structure revised in new tax regime. The new tax slabs are as follows:

Rs 0-3 lakh : Nil
Rs 3-7 lakh: 5%
Rs 7-10 lakh: 10%
Rs 10-12 lakh: 15%
Rs 12-15 lakh: 20%
Above Rs 15 lakh: 30%

Live updates: https://t.co/z1JHNCi29F#BudgetWithNDTV

— NDTV (@ndtv) July 23, 2024

Existing new tax regime slabs (effective for FY 2023-24) were as follows:

The increase in standard deduction was one of the most anticipated ahead of the budget speech.

Industry experts speculated this could double to Rs 1,00,000, but Ms Sitharaman fell slightly short.

In addition, deduction on family pension for pensioners will be increased from Rs 15,000 to Rs 25,000.

These tweaks will bring relief for around four crore salaried individuals and pensioners, she said.

Changes to income tax slabs, old and new, were in focus ahead of Ms Sitharaman’s speech as the country’s mammoth middle class clamoured for relief from tax burdens. There was little joy for the middle class in the interim budget – which pegged gross tax revenue at Rs 38.31 lakh crore for 2024-25, an 11.46 per cent growth over the last fiscal – so all eyes were on the Finance Minister today.

Ms Sitharaman, however, had to walk a tight rope as she looks to stimulate growth and provide relief.

Another big expectation was a hike in exemption limit. Under the new regime, those earning under Rs 3 lakh a year are exempt from paying tax. There was speculation this could be raised to Rs 5 lakh.

There was, however, no such announcement. 

There was also no changes announced for tax slabs under the old regime. This is amid speculation the government plans to do away with this option for next year.

READ | Direct Tax Collection Surges 20% To Rs 5.74 Lakh Crore In 2024-25 So Far

Net direct tax collection posted a robust 19.5 per cent growth to Rs 5.74 lakh crore till July 11 of this financial year compared to the same period in the previous, according to the Income Tax Department.

Capital Gains Tax

Short-term gains on certain financial assets will be taxed at 20 per cent, while long-term gains (on all financial and non-financial assets) will attract tax of 12.5 per cent, Ms Sitharaman said.

READ | Long-Term Capital Gains Tax Increased To 12.5% From 10%

Also, listed financial assets held for over a year have been re-classified as long-term.

Angel Tax Abolished

In a bid to bolster the start-up ecosystem, the government also announced the abolishment of angel tax for all classes of investors.

READ | Angel Tax For All Classes Of Investors To Be Abolished

Angel tax is levied on capital raised via issue of shares by unlisted companies from an Indian investor if the share price of issued shares is seen in excess of the fair market value of the company.

The excess realisation is considered as income and is taxed accordingly.

Abolishing this tax also drew rare praise from the opposition; Congress leader and ex-Finance Minister P Chidambaram said he was “pleased”. “Congress has pleaded for the abolition for many years…”

Other Taxes

Ms Sitharaman also proposed a simpler tax regime for foreign shipping companies operating domestic cruises in the country, with an aim to give a boost to cruise tourism in the country.

Review Of Tax Laws

The Finance Minister also announced a comprehensive review of the Income Tax Act of 1961, which will make it easier to read and understand, and reduce uncertainty and potential for litigation.

This will be completed in six months.

As part of this overhaul, Ms Sitharaman said tax authorities could only re-open assessments within three years from end of assessment and if the escaped income is Rs 50 lakh and over. 

Even then, the time limit for search cases is to be reduced from 10 years to six before year of search.

“A beginning is being made in the Finance Bill by simplifying the tax regime for charities, TDS rate structure, provisions for reassessment and search provisions and capital gains taxation,” she said.

As per the proposal, two tax exemption regimes for charities will be merged into one.

The five per cent TDS, or Tax Deducted at Source, rate is being merged into the two per cent rate and the 20 per cent rate on repurchase of units by mutual funds, or UTI, is being withdrawn, she said.

The TDS rate on e-commerce operators will be reduced from one to 0.1 per cent, she added.

Also, Ms Sitharaman said she proposed to decriminalise delay for payment of TDS, or Tax deducted at Source, up to the due date of filing the concerned statement. 

With input from agencies

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