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2024-07-26T11:31:46
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Rahul Rai
2024-07-26T11:31:46 | 2 Mins to read
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The Union Budget for 2024-25, presented by Finance Minister Nirmala Sitharaman, has introduced significant revisions to the income tax slabs under the new income tax regime, alongside substantial changes in capital gains tax. This comprehensive review explores the revised tax structure and its implications for individual taxpayers and investors.
Under the new income tax regime for FY 2024-25, the tax slabs have been restructured to provide relief to taxpayers, particularly those in the lower-income brackets. The revised slabs are as follows:
In addition to these changes, the standard deduction for taxpayers opting for the new tax regime has been increased from Rs 50,000 to Rs 75,000. This adjustment means that taxpayers with an income up to Rs 3.75 lakh will not have to pay any tax, as opposed to the previous threshold of Rs 3.5 lakh. This increase in the standard deduction provides additional financial relief and encourages more taxpayers to opt for the new regime.
Contrary to some expectations, the Budget did not introduce any changes to the old tax regime. This decision leaves the existing structure unchanged, providing stability for those who prefer the traditional tax calculation methods and associated deductions.
The Budget 2024-25 has introduced significant changes to the taxation of capital gains, which will have a considerable impact on investors.
The long-term capital gains (LTCG) tax on securities has been increased from the current 10% to 12.5%. While this increase may seem like a setback for long-term investors, the Budget also raised the annual LTCG exemption limit from Rs 1 lakh to Rs 1.25 lakh. This means investors will not have to pay any tax on their LTCG up to Rs 1.25 lakh in a financial year. For example, if an investor realizes a long-term capital gain of Rs 2 lakh from stocks or mutual funds, they will only pay Rs 9,375 in tax, which is 12.5% of Rs 75,000 (Rs 2,00,000 - Rs 1,25,000).
The short-term capital gains (STCG) tax has been increased from 15% to 20%. This hike has already created a stir in the equity markets, causing a noticeable drop in benchmark indices. For traders, this means an increased tax burden. For instance, previously, an STCG of Rs 1 lakh would incur a tax of Rs 15,000; under the new regime, it will incur Rs 20,000.
The Budget 2024-25 introduces crucial changes affecting property sales. Firstly, the long-term capital gains (LTCG) tax rate on property sales has been reduced from 20% to 12.5%. Secondly, the benefit of indexation, which adjusts the property's value to reflect current market realities, has been removed for properties bought or inherited on or after 2001. However, for properties bought or inherited before 2001, the indexation benefit remains. This means that if you bought an apartment before 2001, you can still use the property valuation from April 2001 to calculate the indexed price, which will be subtracted from the sale price to determine the capital gains. The tax rate on these gains will be lower, at 12.5%, instead of the previous 20%.
This has been a big blow to many properties who have seen a steep price escalation especially in the last 2 decades.
For e.g. There was a property bought for Rs. 1 crore in 2003.
Market value today Rs. 4 crores
Indexed value of property would be Rs. 2.5 crores
Before the budget, one’s tax liability would be: Rs. 4 crores- Rs. 2.5 crores= Rs. 1.5 crores*20% = Rs. 30 Lakhs tax liability
But post 23rd July 2024, one’s tax liability would be: Rs. 4 crores- Rs. 1 crore = Rs. 3 crores*12.5% = Rs. 37.5 Lakhs
Inspite of LTCG rate being reduced from 20% to 12.5%, the benefit of indexation was a huge incentive especially against inflation. The clear increase in tax liability paints a clear picture of how discouraging this move can be for tax-payers.
When a budget presented on 1st February makes such proposals, the audience has 2 months' time to adjust before the applicability from 1st April. In a post-election interim budget like this, the tax holders have zero window of adjustment.
Given these taxation changes, investors might need to reconsider their strategies to optimize tax efficiency. Here are some potential shifts where bonds can help:
As an alternative to physical gold and gold ETFs, Sovereign Gold Bonds (SGBs) offer significant tax benefits. SGBs provide 0% LTCG tax if held until maturity (8 years), along with a 2.5% annual coupon interest. This makes SGBs an attractive investment for those looking to minimize tax liabilities while gaining from gold investments.
(Another school of thought: Customs duties on gold were reduced to 6% from 10%, this has corrected gold prices. Many would argue that SGBs don’t allow flexibility of exit which can be done on physical gold; however, we need to factor in the Indian investor perception, of holding on to gold culturally. Even though there is an excellent secondary market of gold, as an asset class it is very dear to the Indian investor mindset which won’t easily trade into it, but look for more ways to buy it. An SGB, would promise the same returns as physical gold, with no tax liability on capital gains if held to maturity. We can argue that it is the only asset class apart from ULIPs whichi doesn’t attract LTCG in India.)
Direct investments in bonds have become more appealing under the new tax regime. The coupon interest from these bonds will continue to be taxed at slab rates. For those in the highest tax slab, direct bond investments can provide substantial tax savings compared to debt mutual funds in case of capital gains. Capital gains on Listed bonds held for more than a year will be 12.5% compared to slab rates for debt MFs irrespective of holding period. It is wiser to park your money in corporate bonds directly instead of using the Debt Mutual Fund channel.
With the removal of indexation benefits, 54EC bonds have gained prominence. These bonds, issued by entities like IRFC, PFC, and RECL, allow investors to save up to Rs 50 lakh in taxes per year by investing their capital gains in these bonds. This tax-saving option is particularly beneficial for individuals facing higher capital gains charges due to the lack of indexation. We are positive that 54EC bonds will see a huge traction after this union budget ceasing indexation benefits.
The Budget 2024-25 introduces significant changes to the income tax regime and capital gains tax, impacting taxpayers and investors. The revised income tax slabs and increased standard deduction offer relief to lower-income groups. However, the hikes in LTCG and STCG taxes, alongside the unchanged old tax regime, create immediate market reactions. Despite these short-term fluctuations, the overall market trajectory is expected to remain stable in the long term.
Investors are encouraged to adapt their strategies to optimize tax efficiency considering these changes. By leveraging tax-efficient instruments like SGBs, direct debt investments, and 54EC bonds, taxpayers can navigate the new tax landscape effectively and enhance their financial planning.
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