New Income Tax Regime under Budget 2024-25

Finance Minister Nirmala Sitharaman presented the Union Budget 2024-25 today, meeting high expectations from taxpayers and salaried employees. 

The Union Budget for 2024-25, unveiled by Finance Minister Nirmala Sitharaman, has made noteworthy updates to the income tax slabs within the new tax regime, as well as significant adjustments to capital gains tax. Below is an in-depth examination of the revised tax structure and its potential impact.

Abolition of Angel Tax

The Government has abolished the “Angel Tax,” applicable to investments in startups. This change aims to encourage more investments in startups, both from India and abroad.

Changes in Securities Transaction Tax (STT)

Although there were expectations of restrictions on futures and options (F&O) trading before the Budget, the STT on F&O has been raised to 0.02% and 0.1%, up from 0.01% and 0.06%, respectively. While these changes may cause short-term volatility, they are not expected to fundamentally change the market direction in the long run.

Changes in Capital Gains Tax

One of the most significant announcements was the increase in long-term capital gains (LTCG) tax on securities from 10% to 12.5%. Although this is a setback for long-term investors, the Budget also raised the annual LTCG exemption limit from ?1 lakh to ?1.25 lakh.

In simpler terms, investors will not have to pay any tax on their long-term capital gains up to ?1.25 lakh in a financial year. Beyond this amount, they will pay a 12.5% tax on their gains. For example, if an investor realizes a long-term capital gain of ?2 lakh from stocks or mutual funds, they will pay ?9,375 in capital gains tax, which is 12.5% of ?75,000 (2,00,000 – 1,25,000).

Additionally, the short-term capital gains (STCG) tax has been increasing from 15% to 20%. This change has caused a significant drop in the benchmark indices of the equity markets. For instance, while traders previously paid ?15,000 on STCG of ?1 lakh, they will now have to pay ?20,000 on the same amount.

The increase in STCG tax might lead to a decrease in trading volumes, as investors and traders may choose to hold onto their investments longer to benefit from the lower LTCG tax rate.
Moreover, income from the buyback of shares will now be taxed in the hands of the recipient. Indian professionals working in multinational companies can now avoid penalties for not reporting small foreign assets valued up to ?20 lakhs, which were previously penalized under the Black Money Act.

Increased Deductions for Family Pension

Currently, you can claim a deduction of up to 1/3rd of the family pension you have received, subject to the standard deduction limit of Rs.15,000 as standard deduction. This limit has been raised to ?25,000 if you choose the New Tax Regime. However, I do not believe this change will significantly influence a person’s decision between the Old and New Tax Regimes.

Higher Deduction for Employer's Contribution to NPS (National Pension System)

Your employer’s contribution to your NPS account is added to your income first, then allowed as a deduction under Section 80CCD (2) in both tax regimes. Central Government employees can claim a deduction of up to 14% of their salary for employer contributions to their NPS account, while for others, the maximum deduction is limited to 10%.

To make the New Tax Regime more appealing for salaried employees, the government has proposed increasing the deduction limit from 10% to 14% of salary for employer contributions to the NPS account for all employees. 

However, the overall limit of ?7.50 lakh remains unchanged. Any employer contributions to NPS, Provident Fund, and superannuation exceeding this limit will be taxed as a prerequisite.

Increase in Standard Deduction for New Tax Regime

Additionally, the standard deduction for taxpayers opting for the New Tax Regime has been increased from ?50,000 to ?75,000. This means taxpayers will not have to pay any tax on an income up to ?3.75 lakh; beyond this amount, they will be liable for at least 5% income tax.

Although changes to the Old Tax Regime were anticipated, no such announcements were made in the Budget, and the Old Tax Regime remains unchanged.

Revised Income Tax Slabs for FY 2024-25

Corporate Tax Reduction for Foreign Companies

The Tax Rate for Foreign Companies operating in India will be reduced from 40% to 35%. 

Increased Monetary Limits for Tax Appeals

The limits for filing Tax appeals have been raised:

• Appeals to the Income Tax Appellate Tribunal (ITAT) can be made if the amount involved is more than Rs 60 Lakh.

•  Appeals to the High Court can be made if the amount involved is more than Rs 2 crores.

•  Appeals to the Supreme Court can be made if the amount involved is more than Rs 5 crores.

Budget 2024- 25 brings significant changes to the income tax regime and capital gains tax. The updated income tax slabs are designed to offer relief to lower-income groups, while the higher standard deduction provides further advantages. However, the increases in Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG) taxes, along with the rise in Securities Transaction Tax (STT) on futures and options (F&O), have prompted immediate reactions in the market. Nevertheless, the overall market trend is anticipated to remain stable in the long run.

Author:

Akansha Upadhyay
Rajasthan
B.A.LL.B 4th year student of Banasthali Vidyapith, Rajasthan