The Finance Minister presented an action-packed budget today with a number of changes on the personal taxation and capital gains front. Here are the important changes.
#1 Increase in Capital Gains Tax (Negative)
Long term capital gains (LTCG) tax on sale of stocks/equity funds has been increased from 10% to 12.5%. The exempt LTCG limit has been enhanced from Rs 1 lac to Rs 1.25 lacs.
Short term capital gains tax on sale of stocks/equity funds has been increased from 15% to 20%.
If you invest in equity markets, directly or through mutual funds, you are clearly adversely affected.
Note: The change is on a prospective basis. For instance, you may have already booked up to July 22, 2024. For such gains booked before July 23, 2024, the gains shall be taxed at the old capital gains tax rates. The capital gains resulting from sale of stocks/equity funds on or after July 23, 2024 shall be taxed at 12.5% (long term) and 20% (short-term).
#2 Change in How LTCG on Sale of Property and Gold Is Taxed (Negative)
Long term capital gains from the sale of property are taxed at 20% after indexation. That is about to change. For any long-term capital gains arising out of property sale on or after July 23, 2024, there shall be no benefit of indexation. The gains shall be taxed at flat 12.5% without indexation.
Gold and other unlisted assets shall also be taxed the same way.
This is a huge change and is especially negative if you had losses on your property. Since the concept of indexation does not apply, you will have to book a much lower loss than you would have before July 23, 2024.
| Existing Taxation | Proposed Taxation | ||||||
| Investments | STCG | LTCG | Holding Period (for LTCG) | STCG | LTCG | Holding Period (for LTCG) | |
| Stocks | 15% | 10% w/o indexation | 12 | 20% | 12.5% w/o indexation | 12 | |
| Equity Mutual Funds/Equity ETFs | 15% | 10% w/o indexation | 12 | 20% | 12.5% w/o indexation | 12 | |
| Unlisted stocks (including stocks listed abroad) | Slab Rate | 20% with indexation | 24 | Slab Rate | 12.5% w/o indexation | 24 | |
| Foreign Equity Funds/FoFs (bought on or before March 31, 2023) | Slab Rate | 20% with indexation | 36 | Slab Rate | 12.5% w/o indexation | 24 | |
| Foreign Equity Funds/FoFs (bought after March 31, 2023) | Slab Rate | Slab Rate | No concept of LTCG | Slab Rate | 12.5% w/o indexation | 24 | |
| Foreign Equity ETFs (listed in India) (bought on or before March 31, 2023) | Slab Rate | 20% with indexation | 36 | Slab Rate | 12.5% w/o indexation | 12 | |
| Foreign Equity ETFs (listed in India) (bought after March 31, 2023) | Slab Rate | Slab Rate | No concept of LTCG | Slab Rate | 12.5% w/o indexation | 12 | |
| Existing Taxation | Proposed Taxation | ||||||
| Debt Mutual Fund/Debt FoF (bought on or before March 31, 2023) | Slab Rate | 20% with indexation | 36 | Slab Rate | 12.5% w/o indexation | 24 | |
| Debt Mutual Fund/Debt FoF (bought after March 31, 2023) | Slab Rate | Slab Rate | No concept of LTCG | Slab Rate | Slab Rate | No concept of LTCG | |
| Debt ETFs (bought on or before March 31, 2023) | Slab Rate | 20% with indexation | 36 | Slab Rate | 12.5% w/o indexation | 12 | |
| Debt ETFs (bought after March 31, 2023) | Slab Rate | Slab Rate | No concept of LTCG | Slab Rate | Slab Rate | No concept of LTCG | |
| Listed Bonds | Slab Rate | 10% w/o indexation | 12 | Slab Rate | 12.5% w/o indexation | 12 | |
| Unlisted Bonds | Slab Rate | Slab Rate | 24 | Slab Rate | Slab Rate | No concept of LTCG | |
| Existing Taxation | Proposed Taxation | ||||||
| Real Estate | Slab Rate | 20% with indexation | 24 | Slab Rate | 12.5% w/o indexation | 24 | |
| Gold | Slab Rate | 20% with indexation | 24 | Slab Rate | 12.5% w/o indexation | 24 | |
| Gold ETF (bought on or before March 31, 2023) | Slab Rate | 20% with indexation | 36 | Slab Rate | 12.5% w/o indexation | 12 | |
| Gold ETF (bought after March 31, 2023) | Slab Rate | Slab Rate | No concept of LTCG | Slab Rate | 12.5% w/o indexation | 12 | |
| Gold Mutual Fund (bought on or before March 31, 2023) | Slab Rate | 20% with indexation | 36 | Slab Rate | 12.5% w/o indexation | 24 | |
| Gold Mutual Fund (bought after March 31, 2023) | Slab Rate | Slab Rate | No concept of LTCG | Slab Rate | 12.5% w/o indexation | 24 | |
| Sovereign Gold Bond (SGBs)* | Slab Rate | 20% with indexation | 36 | Slab Rate | 12.5% w/o indexation | 12 | |
| REITs/INVITs | 15% | 10% w/o indexation | 36 | 20% | 12.5% w/o indexation | 12 | |
| *Sovereign gold bonds (SGB), if held to maturity or if redeemed with RBI, do not result in capital gains. Please consult a Chartered Accountant before acting on above information. | |||||||
#3 Changes on the Personal Taxation (Positive)
No changes if you are filing returns under the old tax regime.However, if you are filing returns under the new tax regime, the standard deduction limit has been increased from Rs 50,000 to Rs 75,000. Standard deduction for the old tax regime remains at 50,000. Clearly, the aim is to incentivize the new tax regime.
| Old Tax Regime (With Tax Deductions) | New Tax Regime (without deductions) | |||||
| Existing | Proposed in Union Budget 2024 | Existing | Proposed in Union Budget 2024 | |||
| Taxable Income | Tax Rate | Tax Rate | Taxable Income | Tax Rate | Taxable Income | Tax Rate |
| Up to Rs 2.5 lacs | NIL | No Change | Up to Rs 3 lacs | NIL | Up to Rs 3 lacs | NIL |
| Rs 2.5 lacs – Rs 5 lacs | 5% | No Change | Between Rs 3 lacs and Rs 6 lacs | 5% | Between Rs 3 lacs and Rs 7 lacs | 5% |
| Rs 5 lacs – Rs 10 lacs | 20% | No Change | Between Rs 6 lacs and Rs 9 lacs | 10% | Between Rs 7 lacs and Rs 10 lacs | 10% |
| Between Rs 9 lacs and 12 lacs | 15% | |||||
| Above Rs 10 lacs | 30% | No Change | Between Rs 10 lacs and 12 lacs | 15% | ||
| Between Rs 12 lacs and Rs 15 lacs | 20% | Between Rs 12 lacs and Rs 15 lacs | 20% | |||
| Above 15 lacs | 30% | Above 15 lacs | 30% | |||
This will help in saving a bit of tax, but not a lot. About 17,500 if your income is about Rs 20 lacs.
#4 Higher Tax Benefit for NPS Contribution by Employer (Positive)
You get tax benefit if your employer contributes to your NPS account. Up to 10% of Basic + DA. This benefit is available under both the old and the new tax regime.
The Govt. proposes to enhance this benefit, but only for the new tax regime.
So, if you file your tax returns under the new tax regime, the tax benefit (deduction) for employer contribution to NPS account goes from 10% to 14%. This could be good tax saving avenue for high income earners (provided they see merit in investing in NPS).
If you file returns under the old tax regime, the benefit remains capped at 10% of salary.
Note: For Central and State Government employees, this limit was already 14%, irrespective of whether they filed the returns under the old or the new tax regime. For Government employees, there is no change. The above change is only applicable for private sector employees.
#5 NPS Account for Minors (Neutral)
Now, you can open NPS account for your children. When they turn 18, this account will be turned into a regular NPS account.
Until now, PPF and SSY were the preferred vehicles for long-term fixed income savings for children. Going forward, NPS may also form part of the consideration set.
PPF and SSY have maximum investment limits. NPS has no such limits. Hence, I am not sure if this will make a lot of sense. Additionally, NPS has many restrictions for withdrawals. It is difficult to see NPS-Vatsalya as an avenue to save for kids’ education and marriage.
As I understand, there is no tax benefit for investing in NPS-Vatsalya.
#6 Relief for Foreign Equity and Gold Mutual Funds (Positive)
In a major tax change in March 2023, the taxation of debt mutual funds was changed. The concept of long-term capital gains for mutual funds was removed for debt mutual fund units bought on or after April 1, 2023.
However, given the way the debt mutual funds (technically specified mutual funds) were defined, gold mutual funds, gold ETFs, and even foreign equity mutual funds were to be treated as debt funds from point of view of taxation.
However, with the proposed amendment to Section 50AA, gold MFs, gold ETFs, and foreign equity will no longer be clubbed with debt funds and will be eligible for long term capital gains taxation. As per the budget announcements, such long term capital gains on gold ETFs/MFs and foreign equity funds will be taxed at 12.5 percent.
#7 Reduction in Import Duty on Gold (Positive)
The customs duty on gold has been reduced from 15% to 6%. Straightaway reduces the price of gold. Good news if you were planning to buy gold soon. Not so good if you have already invested a lot of money in gold.
#8 STT Hike for Futures and Options
This was along expected lines. The decision makers in the regulator (SEBI) and the Government have been worried about the sharp rise in volumes in the derivatives market.
To curb speculation, the Securities Transaction Tax (STT) has been hiked from 0.0625% to 0.1% on sale of options. STT for sale of futures has been hiked from 0.0125% to 0.02%.
#9 Limit for Mudra Loans Enhanced from Rs 10 Lacs to 20 Lacs
This applies only to those entrepreneurs who have taken and successfully repaid previous Mudra loans under the ‘Tarun’ category.
Author’s Disclaimer: This post is based on my understanding of the budget provisions. There may be an error in my understanding. Please consult a Chartered Accountant before taking any action.