Direct Tax Changes in Budget 2024: What You Need to Know

The Union Budget 2024, presented by Finance Minister Smt. Nirmala Sitharaman, has stirred both excitement and debate across India. While the budget addresses a broad spectrum of economic concerns, the direct tax proposals have garnered significant attention due to their potential impact on individual taxpayers and businesses. In this comprehensive article, we'll delve into the key direct tax changes, their implications, and what they mean for your financial planning.

Understanding Direct Taxes

Direct taxes play a pivotal role in India's fiscal framework, serving as a major source of government revenue. These taxes are levied directly on the income or profits earned by individuals, Hindu Undivided Families (HUFs), firms, companies, and other entities. This stands in contrast to indirect taxes, which are levied on goods and services and are ultimately borne by the end consumer.

Key Direct Taxes in India

1. Income Tax:

• Who Pays: Individuals, HUFs, firms, and companies.
• What's Taxed: Income earned from various sources, including salary, business profits, capital gains, house property, and other sources.
• How It's Calculated: Based on a slab system, where different tax rates apply to different income brackets. Deductions, exemptions, and tax credits can be availed to reduce the tax liability.
• Filing and Compliance: Individuals and entities are required to file annual income tax returns (ITRs), declaring their income and paying taxes accordingly.

2. Corporate Tax:

• Who Pays: Companies registered under the Companies Act.
• What's Taxed: Net profits earned by companies during a financial year.
• How It's Calculated: A flat rate applies to most companies, with specific provisions for new manufacturing companies and small companies.
• Filing and Compliance: Companies are required to file annual corporate tax returns and comply with various tax regulations.

Other Direct Taxes:

While income tax and corporate tax are the primary direct taxes, there are a few other types that are relevant in specific scenarios:

• Wealth Tax: This tax was abolished in 2015 but is sometimes discussed for reintroduction. It was levied on the net wealth of individuals exceeding a certain threshold.
• Minimum Alternate Tax (MAT): MAT is a tax levied on companies that pay little or no tax due to various deductions and exemptions. It ensures that a minimum amount of tax is paid.

Key Direct Tax Proposals in Budget 2024

1. Enhanced Standard Deduction:

• From Rs. 50,000 to Rs. 75,000: The standard deduction, a flat amount that is deducted from your gross salary before calculating tax, has been increased substantially from Rs. 50,000 to Rs. 75,000 for salaried individuals opting for the new tax regime. This deduction is available regardless of actual expenses incurred.

• Impact: This increase means an additional tax saving of Rs. 5,250 for those in the 30% tax bracket. The higher standard deduction aims to provide relief to salaried individuals and compensate for the loss of certain deductions and exemptions under the new regime.

2. Increased Family Pension Deduction:

• From Rs. 15,000 to Rs. 25,000: Pensioners receiving a family pension and choosing the new tax regime will now be eligible for a higher deduction of Rs. 25,000, up from Rs. 15,000 previously.

• Impact: This enhancement is designed to provide additional tax relief to pensioners, particularly those who rely on family pensions as a major source of income.

Why These Changes Matter:

• Increased Disposable Income: Both these enhancements translate to greater disposable income for salaried individuals and pensioners, potentially boosting consumption and overall economic growth.
• Attractiveness of New Regime: By sweetening the deal with higher deductions, the government is incentivizing more taxpayers to switch to the new tax regime, which offers lower tax rates but with fewer deductions and exemptions.
• Simplified Tax Structure: The increased standard deduction aligns with the government's goal of simplifying the tax structure by reducing the need for taxpayers to track and claim various deductions.

Key Points to Note:

• Applicability: These enhanced deductions are available only to taxpayers who choose the new tax regime.
• Financial Year 2024-25: The increased limits for standard deduction and family pension deduction are applicable from the financial year 2024-25 (Assessment Year 2025-26).

3. Revamped Tax Rates For New Tax Regime

Budget 2024 has brought about significant changes to the new tax regime, aiming to make it more appealing to taxpayers. A key feature of this revamp is the revised tax structure, which offers lower tax rates at various income slabs.

Understanding the Impact:

• Lower Tax Rates: The new tax regime now offers lower tax rates compared to the old regime across most income slabs. This can result in significant tax savings for individuals, especially those in higher income brackets.

• Example: Let's consider a salaried individual with an annual income of ₹12 lakh. Under the old regime, assuming no deductions or exemptions, their tax liability could be around ₹1,25,000. However, under the new regime, their tax liability would be reduced to ₹85,000, resulting in a saving of ₹40,000.

• Potential Tax Saving of Rs. 17,500: The government's estimate of a potential tax saving of up to Rs. 17,500 is likely based on specific income levels and deductions available under the old regime. Individual savings can vary depending on their income and financial circumstances.

• Trade-off: While the new regime offers lower tax rates, it comes with a catch: you must forgo most deductions and exemptions available under the old regime. Therefore, it's crucial to assess your individual financial situation and compare both regimes before making a decision.

4. Simplifying Capital Gains Taxation

Budget 2024 has introduced several key changes to the taxation of capital gains, with a focus on simplification, alignment of various asset classes, and providing relief to certain investor segments. Let's break down these changes and their implications:

a) Streamlined Holding Periods:

• Two Holding Periods: The government has simplified the classification of assets into long-term and short-term by reducing the number of holding periods to just two: 12 months and 24 months. The previously existing 36-month holding period has been eliminated.
• Listed Securities (12 Months): All listed securities, including shares and equity-oriented mutual funds, will now be considered long-term if held for more than 12 months.
• Other Assets (24 Months): All other assets, including real estate, unlisted shares, and debt instruments, will be classified as long-term if held for more than 24 months.

b) Unlisted Bonds and Debentures:

• Taxation at Slab Rates: Unlisted bonds and debentures will now be taxed at the applicable slab rates, similar to debt mutual funds and market-linked debentures. This means they will be treated as short-term assets, regardless of the holding period.

c) Increased Tax on Short-Term Capital Gains:

• 20% for Listed Securities: The tax on short-term capital gains (STCG) from listed equity shares, equity-oriented funds, and units of business trusts has been increased from 15% to 20%.
• Slab Rates for Other Assets: STCG on other financial and non-financial assets will continue to be taxed at the applicable slab rates.

d) Increased Exemption Limit for Long-Term Capital Gains:

• Rs. 1.25 Lakh for Equity: The exemption limit for long-term capital gains (LTCG) from the sale of equity shares, equity-oriented funds, and units of business trusts has been increased from Rs. 1 lakh to Rs. 1.25 lakh per year.

e) Increased Tax Rate for LTCG on Equity:

• 12.5% for Equity: The tax rate on LTCG from equity shares, equity-oriented funds, and units of business trusts has been increased from 10% to 12.5%.

f) Reduced Tax Rate for LTCG on Other Assets:

• 12.5% for Other Assets: The tax rate on LTCG from other financial and non-financial assets has been reduced from 20% to 12.5%.

g) Removal of Indexation Benefit:

• No Indexation for Long-Term Assets: The indexation benefit, which allowed adjusting the purchase cost of an asset for inflation, has been removed for all long-term assets sold on or after July 23, 2024.

5. TDS Rate Reductions

Budget 2024 has introduced several key changes to the Tax Deducted at Source (TDS) rates, aiming to improve business cash flow, incentivize compliance, and simplify tax administration. These changes primarily involve reducing TDS rates on various types of payments.

Implications and Benefits:

• Improved Cash Flow: Lower TDS rates mean businesses and individuals will have more cash in hand, potentially leading to increased spending and investment.
• Incentive for Compliance: Reduced TDS rates can encourage taxpayers to report their income accurately and pay taxes on time, as the tax burden at the time of payment is lower.
• Simplified Tax Administration: The removal of TDS on mutual fund unit repurchases (Section 194F) simplifies the process for investors and fund houses.

6. New TDS Provision (Section 194T)

Budget 2024 has introduced a significant change in the Tax Deducted at Source (TDS) regime, targeting payments made by firms to their partners. This new provision, under Section 194T of the Income Tax Act, aims to enhance tax compliance and streamline revenue collection in the context of partnership firms and Limited Liability Partnerships (LLPs).

Key Features of Section 194T:

• Applicability: This provision applies to both partnership firms and LLPs.
• Payments Covered: It covers various types of payments made by a firm to its partners, including salary, remuneration, interest, bonus, and commission.
• Threshold Limit: TDS is applicable only when the total amount of such payments to a partner exceeds Rs. 20,000 in a financial year.
• TDS Rate: The TDS rate on these payments is 10%.
• Deduction and Deposit: Firms are required to deduct TDS at the time of making the payment and deposit it with the government within the stipulated timelines.
• Credit for TDS: Partners can claim credit for the TDS deducted from their income while filing their income tax returns.

Objectives and Implications:

• Enhancing Tax Compliance: The primary objective of this new provision is to improve tax compliance among firms and their partners. By requiring TDS deduction at source, the government aims to ensure that taxes on these payments are not evaded.
• Streamlining Revenue Collection: This measure is also expected to streamline revenue collection by ensuring that taxes on partner payments are collected in a timely and efficient manner.
• Transparency and Accountability: The introduction of TDS on partner payments promotes transparency in business transactions and strengthens the accountability of firms towards their tax obligations.
• Impact on Firms: Firms will need to adjust their accounting and payroll processes to incorporate the TDS deduction mechanism.
• Impact on Partners: Partners will receive payments net of TDS and can claim credit for the same while filing their tax returns.

7. Higher Remuneration Limits for Partners

Budget 2024 has brought about a significant change for partnership firms by increasing the permissible limit for partner remuneration under Section 40(b) of the Income Tax Act. This move aims to provide greater flexibility to firms in remunerating their partners and potentially reduce their overall tax burden.

Understanding Section 40(b)

Section 40(b) of the Income Tax Act deals with the deductibility of partner remuneration from the firm's income. It sets a maximum limit on the amount of remuneration that a firm can pay to its partners and claim as a deduction while calculating its taxable income. This limit is determined based on the firm's book profit.

Increased Remuneration Limits

Budget 2024 has revised the limits for partner remuneration as follows:

Implications and Benefits:

• Higher Deductible Remuneration: The increased limits allow firms to pay higher remuneration to their partners, which can be fully deducted from the firm's income for tax purposes.
• Reduced Tax Liability for Firms: By claiming higher deductions for partner remuneration, firms can potentially lower their taxable income and reduce their overall tax liability.
• Attracting and Retaining Talent: Higher remuneration limits can make partnership firms more attractive to talented individuals, allowing firms to attract and retain skilled partners.
• Flexibility for Firms: The revised limits provide firms with greater flexibility in structuring their remuneration policies for partners.
• Boosting Partnership Ecosystem: This measure can contribute to the growth and development of the partnership model in India by making it more financially viable for firms and partners.

8. Abolition of Angel Tax

Budget 2024 has brought a wave of optimism for the Indian startup ecosystem by proposing the removal of the controversial Angel Tax provisions under Section 56(2)(viib) of the Income Tax Act. This move is expected to have far-reaching positive consequences for startups, investors, and the overall economy.

What is Angel Tax?

Angel Tax was introduced to curb money laundering through the issuance of shares at inflated prices. It imposed a tax on startups when they received funding from investors at a valuation higher than the company's "fair market value" (FMV). This excess premium was considered income and taxed accordingly, often causing significant financial strain for startups in their early stages.

Why the Abolition Matters:

• Boosting Fundraising: Startups, especially in their initial stages, heavily rely on external funding to fuel their growth. The angel tax often deterred investors due to the potential tax liability, making fundraising a challenging process. Its removal will significantly simplify and streamline fundraising, attracting more angel investors and venture capitalists.

• Reducing Compliance Burden: The angel tax involved complex valuations and compliance procedures, consuming valuable time and resources for startups. Abolishing it will free up startups to focus on their core business activities, fostering innovation and growth.

• Promoting Investment: By removing the tax hurdle, Budget 2024 is sending a positive signal to investors, both domestic and international. This could lead to increased investments in Indian startups, further driving the country's startup ecosystem.

• Fostering Innovation: The angel tax inadvertently hindered innovation by discouraging risk-taking and experimentation. Its abolition will create a more conducive environment for startups to innovate and disrupt traditional industries.

• Job Creation: A thriving startup ecosystem is a significant source of job creation. The removal of angel tax is expected to accelerate the growth of startups, leading to more employment opportunities, particularly for the youth.

Impact on the Economy:

The abolition of angel tax is not just beneficial for startups; it also has broader economic implications. A vibrant startup ecosystem contributes to economic growth, fosters innovation, and creates a competitive environment that benefits consumers. It can also attract foreign investment and enhance India's global standing in the startup landscape.

Challenges and Considerations:

While the removal of angel tax is widely welcomed, there are some challenges that need to be addressed:

• Valuation: Determining the fair market value of startups remains a complex issue. The government needs to establish clear guidelines and transparent mechanisms for valuation to prevent misuse of this provision.
• Monitoring: The government should maintain vigilant monitoring to ensure that the removal of angel tax does not lead to any unintended consequences, such as money laundering or tax evasion.

9. Corporate Tax Reduction for Foreign Companies

Finance Minister Nirmala Sitharaman's proposal in Budget 2024 to reduce the corporate tax rate for foreign companies from 40% to 35% is a significant move with potential ramifications for both the Indian economy and global businesses. This measure aims to create a more attractive investment landscape for foreign companies and boost India's competitiveness in the global market.

Understanding Corporate Tax for Foreign Companies:

Corporate tax is levied on the net income or profit earned by companies operating in India. For foreign companies, the tax rate has traditionally been higher than that for domestic companies. This is because foreign companies are often seen as having a lower stake in the Indian economy and may repatriate their profits back to their home countries.

The Proposed Reduction:

The proposal to reduce the corporate tax rate for foreign companies to 35% aligns it more closely with the corporate tax rate for domestic companies, which currently stands at around 25% for most companies (with certain variations based on company size and sector).

Implications and Benefits:

• Attracting Foreign Investment: A lower corporate tax rate makes India a more attractive destination for foreign direct investment (FDI). This can lead to increased capital inflows, technology transfer, and knowledge sharing.
• Boosting Economic Growth: Foreign investment plays a crucial role in driving economic growth, creating jobs, and enhancing productivity. By attracting more foreign companies, India can accelerate its economic development.
• Level Playing Field: Reducing the tax rate for foreign companies creates a more level playing field with domestic companies, promoting fair competition and potentially fostering innovation.
• Tax Revenue: While a lower tax rate may seem counterintuitive for revenue generation, it is expected that the increased volume of foreign investment and economic activity resulting from this change will ultimately offset the initial reduction in tax rates.
• Global Competitiveness: Aligning corporate tax rates with global standards enhances India's competitiveness and can attract multinational corporations seeking to expand their operations.

10. Increased Deduction for Employer's Pension Contribution

Budget 2024 has brought about a significant enhancement to retirement savings by increasing the deduction limit for employer contributions to pension schemes under Section 80CCD of the Income Tax Act. This move aims to incentivize both employers and employees to contribute more towards retirement and secure a comfortable future.

Section 80CCD: A Recap

Section 80CCD allows for tax deductions on contributions made towards the National Pension System (NPS) and Atal Pension Yojana (APY). The deduction is available to both employees and employers. Previously, the maximum deduction allowed for an employer's contribution to an employee's pension scheme was 10% of the employee's salary.

The Increased Limit:

Budget 2024 has raised the deduction limit for employer contributions to 14% of the employee's salary. This means that employers can now contribute a higher amount towards their employees' pension schemes, and both parties can benefit from the tax deduction.

Implications and Benefits:

• Increased Retirement Savings: The higher deduction limit encourages employers to contribute more towards their employees' retirement savings, thereby ensuring a larger corpus for their future.
• Tax Savings for Employees: Employees can claim a tax deduction on the total amount of employer and employee contributions up to 14% of their salary, subject to overall limits specified under Section 80CCE.
• Attracting and Retaining Talent: Employers can use the increased deduction limit as an attractive employee benefit, helping them attract and retain skilled talent.
• Financial Security: The increased pension contributions can lead to a more secure financial future for employees post-retirement.
• Long-Term Savings: This measure promotes a culture of long-term savings, which is essential for individuals to meet their financial goals after retirement.

Key Points to Consider:

• Employer's Discretion: The increased limit is not mandatory, and employers can choose to contribute up to 14% based on their financial capabilities and policies.
• Overall Limits: The combined deduction under Section 80CCE (including 80C, 80CCD, and others) remains capped at a certain limit.

11. Securities Transaction Tax (STT): Higher Rates for Futures and Options Trading

Budget 2024 has brought about a significant change in the STT rates applicable to futures and options trading. The STT is a tax levied on every purchase or sale of securities on the stock exchanges. Let's break down the changes:

• Futures: The STT rate on futures transactions has been increased from 0.0125% to 0.02%. This means that for every ₹1 lakh worth of futures contracts traded, the STT payable will be ₹20, up from ₹12.50 previously.
• Options: The STT rate on options transactions has seen a steeper increase, going from 0.0625% to 0.1%. This means that for every ₹1 lakh worth of options contracts traded, the STT payable will be ₹100, up from ₹62.50 previously.

What this means for traders:

• Increased Trading Costs: The higher STT rates directly translate to increased trading costs for traders and investors participating in the derivatives market.
• Impact on High-Frequency Trading: The increased rates may particularly impact high-frequency traders who execute a large number of trades in a short period.
• Revenue Generation: The government aims to generate additional revenue through these increased STT rates.

Reasons for the Increase:

• Revenue Generation: The primary reason behind the increase in STT rates is to boost government revenue. The derivatives market has witnessed significant growth in recent years, and the government sees this as an opportunity to tap into the increased trading activity.
• Curbing Speculative Trading: Some experts believe that the higher STT rates could act as a deterrent to excessive speculative trading in the derivatives market, promoting more stable and sustainable market conditions.

12. Additional Direct Tax Updates

In addition to the key proposals in Budget 2024, there are several other notable updates in the direct tax landscape that are worth exploring. These changes primarily focus on simplifying tax administration, reducing litigation, and promoting dispute resolution.

a) Reopening of ITRs:

• Higher Threshold for Reopening: The government has raised the threshold for reopening income tax returns (ITRs) beyond three years from the end of the assessment year. Now, an assessment can only be reopened if the escaped income is Rs. 50 lakh or more, up to a maximum of five years from the end of the assessment year.
• Reduced Time Limit for Search Cases: In cases involving search and seizure operations, the time limit for reopening assessments has been reduced from 10 years to six years.
• Objective: This change aims to reduce unnecessary scrutiny of taxpayers and limit the reopening of assessments to cases with substantial escaped income, promoting a more taxpayer-friendly approach.

b) Income Tax Appeals:

• Higher Monetary Limits: The monetary limits for filing appeals in tax tribunals, high courts, and the Supreme Court have been increased. This means that appeals can now be filed only if the disputed tax amount exceeds the specified thresholds.
• Revised Limits: The new limits are as follows:
  • Tax Tribunals: Rs. 60 lakh
  • High Courts: Rs. 1 crore
  • Supreme Court: Rs. 2 crore
• Objective: By raising the monetary limits, the government aims to reduce the number of pending tax cases, expedite dispute resolution, and unclog the judicial system.

c) Vivaad se Vishwas Scheme 2.0:

• Reintroduction: The government has reintroduced the Vivaad se Vishwas scheme, a dispute resolution mechanism that allows taxpayers to settle pending income tax disputes by paying a certain percentage of the disputed tax amount.
• Benefits: The scheme offers several benefits to taxpayers, including immunity from prosecution, waiver of interest and penalty, and closure of pending litigation.
• Objective: The scheme aims to encourage taxpayers to come forward and resolve their tax disputes amicably, reducing the burden on the judiciary and promoting a more cooperative tax environment.

These additional direct tax updates, coupled with the key proposals in Budget 2024, reflect the government's commitment to simplifying the tax regime, reducing litigation, and improving taxpayer convenience. The increased thresholds for reopening ITRs and filing appeals, along with the reintroduction of the Vivaad se Vishwas scheme, are expected to streamline tax administration and promote a more efficient and taxpayer-friendly tax system.

Conclusion

The direct tax proposals in Budget 2024, along with the additional updates discussed, represent a significant shift in India's tax landscape. They reflect the government's ongoing commitment to simplifying the tax regime, boosting compliance, and creating a more conducive environment for businesses and individuals alike.

Key Takeaways:

• New Tax Regime Gains Traction: The enhancements to the new tax regime, such as increased standard deductions and revised tax slabs, make it a compelling option for many taxpayers.
• Capital Gains Simplified: The streamlined holding periods and alignment of tax rates for different asset classes aim to simplify capital gains taxation, though the removal of indexation benefits may require careful consideration for some investors.
• TDS Reforms: The reduction in TDS rates and the removal of TDS on mutual fund unit repurchases are expected to improve cash flow for businesses and individuals, while also encouraging compliance.
• Focus on Dispute Resolution: The reintroduction of the Vivaad se Vishwas scheme and the increased thresholds for filing appeals highlight the government's focus on resolving tax disputes amicably and reducing litigation.

Looking Ahead:

While the full impact of these changes will unfold over time, it's clear that Budget 2024 has set the stage for a more transparent, efficient, and taxpayer-friendly direct tax system in India. As taxpayers and businesses adapt to these new provisions, it's crucial to stay informed, seek professional advice when needed, and make informed decisions to optimize tax planning and compliance.

The evolving tax landscape presents both challenges and opportunities. By understanding these changes and their potential impact, taxpayers can proactively navigate the tax regime and ensure they are maximizing their benefits while fulfilling their tax obligations.

Disclaimer:

The information provided in this article about the direct tax proposals in Budget 2024 is for general informational purposes only and should not be considered as professional financial or tax advice. While we have made every effort to ensure the accuracy and completeness of the information presented, tax laws are complex and subject to change.

The specific application of tax rules can vary depending on individual circumstances. Therefore, we strongly recommend consulting with a qualified tax advisor or financial professional for personalized guidance tailored to your unique situation.

We do not assume any responsibility for errors, omissions, or any losses, injuries, or damages arising from the use of this information. Please use your discretion and judgment when making financial decisions based on the information provided in this article.