Tax burden on lower, middle-income brackets down, but tax complexity remains

The Union Budget for 2024-25has introduced several key changes aimed at streamlining the tax regime. The revised income tax slab will lead to savings of ₹17,500 a year for individuals.

The Budget proposes adjustments to personal income tax slabs to provide relief to the middle class and boost disposable incomes.

Key changes include:

• Revised tax slabs: Income ranging from ₹3 lakh to ₹7 lakh will attract a 5% tax rate, previously applicable to income between ₹3 lakh and ₹6 lakh. Incomes of ₹7 lakh and ₹10 lakh face a 10 per cent tax rate, previously applied to income of ₹6-9 lakh. Incomes of ₹10-12 lakh face are subjected to 15 per cent tax, while the previous range was ₹9-12 lakh. For those with incomes between ₹12 lakh and ₹15 lakh, the tax rate remains 20 per cent. Similarly, the tax rate remains 30 per cent for those earning above ₹15 lakh.
• However, the overall complexity of the tax system remains, with various exemptions and deductions still in place. This continues to necessitate careful tax planning and could complicate compliance for ordinary taxpayers.
  
• Standard deduction: The increase in the standard deduction from ₹50,000 to ₹75,000 is a welcome move, offering a flat reduction in taxable income. This change will likely simplify tax calculations for salaried individuals and pensioners, but the persistence of other complex provisions might mute its overall impact.

Indexation

Indexation is designed to mitigate the effects of inflation on capital gains by adjusting the purchase price of assets. The Budget maintains the indexation benefit for long-term capital gains, which is crucial for:

• Equity investments: Long-term equity investments continue to enjoy indexation benefits, which encourage long-term holdings and reduce the tax burden on inflation-adjusted gains. For example, if an equity asset purchased for ₹1,00,000 five years ago is now sold for ₹2,00,000, indexation can adjust the purchase price to account for inflation, reducing the taxable gain.

• Real estate investments: Real estate investors benefit significantly from indexation, especially given the typically long holding periods and high appreciation rates. The challenge lies in accurately calculating indexed costs over extended periods, which can be cumbersome and prone to errors.

Capital gains tax

The Budget's approach to capital gains tax (CGT) reflects a balancing act between encouraging long-term investment and ensuring fair tax revenue collection.

• Short-term capital gains (STCG): Taxed at higher rates, STCG applies to assets held for less than a year. For example, short-term gains from equity investments are taxed at 15 per cent, while gains from other assets are added to income and taxed at applicable slab rates. The budget maintains this higher rate to discourage speculative trading and promote stability in the financial markets. However, it may deter investors seeking short-term opportunities, potentially impacting market liquidity.
• Long-term capital gains (LTCG): The lower tax rate on LTCG, combined with indexation benefits, incentivises long-term investment. LTCG from equity investments exceeding ₹1 lakh is taxed at 10 per cent without indexation benefits, while gains from other assets are taxed at 20 per cent with indexation. However, changes in the holding period criteria and tax rates can lead to strategic tax planning, where investment decisions are driven more by tax efficiency than economic fundamentals.

Simplifying the process for calculating indexed costs is expected to reduce administrative burdens and errors, making it easier for taxpayers to comply with the law. Ensuring balanced capital gains tax rates and holding period requirements will help foster a more stable investment environment without penalising short-term investors.

While some measures aim to simplify the system and promote investment, others may inadvertently add to the complexity and uncertainty faced by taxpayers. A more streamlined, transparent, and consistent approach is necessary to achieve the Budget's goals of economic growth and taxpayer relief.

As the new policies take effect, continuous assessment and adjustment will be crucial to addressing emerging challenges and ensuring that the tax system remains fair and efficient.

STCG

• Tax rate increase: The tax rate on short-term capital gains has been increased from 15 per cent to 20 per cent. This applies to profits from the sale of assets held for less than 12 months, particularly for listed equity shares.
• Exemption limit: The exemption limit for STCG has been raised to ₹1.25 lakh, allowing taxpayers to offset gains up to this amount against their total income before taxation.

LTCG

• Tax rate increase: The long-term capital gains tax rate has been increased from 10 per cent to 12.5 per cent on gains exceeding ₹1.25 lakh. This applies to assets held for more than 12 months.
• Exemption limit: The exemption limit for LTCG has also been increased from ₹1 lakh to ₹1.25 lakh, allowing for more tax-free gains before the higher tax rate applies.