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. Here's a detailed look at the revised tax structure and its implications.
Revised Income Tax Slabs
Under the new income tax regime for FY 2024-25, the tax slabs have been restructured as follows:
- Up to Rs 3 lakh: NIL
- From Rs 3 lakh to Rs 7 lakh: 5%
- From Rs 7 lakh to Rs 10 lakh: 10%
- From Rs 10 lakh to Rs 12 lakh: 15%
- From Rs 12 lakh to Rs 15 lakh: 20%
- Above Rs 15 lakh: 30%
In addition, the standard deduction for taxpayers opting for the new tax regime has been increased from Rs 50,000 to Rs 75,000. (This essentially means that taxpayers will not have to pay any tax up to an income of Rs. 3.75 lakh post which they will be liable to pay at least 5% income tax.)
While it was expected that announcements related to changes in the old tax regime might be made, no such announcements on old tax regime were made in the Budget and the regime remains unchanged.
Changes in Capital Gains Tax
One of the most impactful announcements was the hike in long-term capital gains (LTCG) tax on securities from the current 10% to 12.5%. While this comes as a whammy to long term investors, the Budget also announced an increase in the annual LTCG exemption limit from Rs. 1 lakh currently to Rs. 1.25 lakh.
In simpler terms – investors will not have to pay any tax on their Long term Capital Gains of up to Rs. 1.25 lakh in a financial year above which they will end up paying 12.5% tax on their gains. E.g. If an investor books a long term capital gain of Rs. 2 lakh for stocks or mutual funds, he/she will end up paying Rs. 9,375 i.e. 12.5% of Rs. 75,000 (2,00,000-1,25,000) as capital gains tax.
Furthermore, short-term capital gains (STCG) tax has been increased from 15% to 20%. This change has created a stir in the equity markets, causing the benchmark indices to experience a significant drop. In other words, while the traders paid a tax of Rs. 15,000 on STCG of Rs. 1 lakh till date, they will now have to pay Rs. 20,000 as STCG on short term profits of Rs. 1 lakh.
The move to increase STCG might have an impact on the trading volumes with investors and traders choosing to hold on to their investments for a longer period of time to avail lower taxation through LTCG route.
Additionally, income from the buyback of shares will now be taxed at the hands of the recipient. Indian professionals in multinational companies can now de-penalize non-reporting of small foreign assets valued up to ₹20 lakhs, previously penalized under the Black Money Act.
Increase in Securities Transaction Tax (STT)
While restrictions on F&O trading were expected before the Budget, the STT on F&O has been increased to 0.02% and 0.1% respectively from 0.01% & 0.06%. These measures, while creating short-term volatility, are not expected to fundamentally alter the market direction in the long run.
Impact on the Market
To discourage retail traders from allocating household savings into derivatives trading, which was labelled as "gambling" in the Economic Survey, the Finance Minister increased the securities transaction tax (STT) in the futures and options (F&O) segment. This hike in STT is seen as negative for brokers and exchanges but is part of broader efforts to curb the rising fascination of retail traders with the derivatives market, which was originally intended as a hedging tool for large institutional investors.
The increase in STT could potentially reduce market volumes and depth, impacting the revenues of exchanges and SEBI. Some market participants had also proposed treating income from F&O trading as speculative income, which would be taxed at a higher rate.
Summary
The Budget 2024-25 introduces notable changes in the income tax regime and capital gains tax. The revised income tax slabs aim to provide relief to lower-income groups, while the increased standard deduction offers additional benefits. However, the hikes in LTCG and STCG taxes, along with the increased STT on F&O, have created immediate market reactions. Despite this, the overall market trajectory is expected to remain stable in the long term.
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