In the Budget for 2024-25, Finance Minister has made the ‘new regime’ of personal income tax more appealing, while continuing to rationalise the capital gains tax structure

In the Union Budget for 2024-25, Finance Minister Nirmala Sitharaman has endeavoured to make the ‘new regime’ of personal income tax (PIT) a bit more attractive besides continuing the process of ‘rationalising’ and ‘simplifying’ the structure of capital gains tax (CGT) that was started in her budget for FY 2023-24. Sitharaman had introduced the new PIT regime in the Budget for 2020-21. Even while retaining a 5 per cent tax for annual income in the Rs 250,001-Rs 500,000 range (as under the old regime before 2020-21), on income higher than Rs 500,000, the government levied: 10 per cent on Rs 500,001-Rs 750,000; 15 per cent on Rs 750,001-Rs 1,000,000; 20 per cent on Rs 1,000,001-Rs 1,250,000; 25 per cent on Rs 1,250,001-Rs 1,500,000. For income above Rs 1,500,000, the 30 per cent tax continued. Unlike the old regime where persons could claim annual exemptions and deductions on long-term investments up to a maximum of Rs 375,000, none was allowed under the new regime.

However, individuals were given the choice to go either for the new regime or continue with the old regime. In the Budget for 2023-24, she altered the tax new structure to provide for nil tax on income up to Rs 300,000; 5 per cent tax on income in the Rs 300,001-Rs 600,000 bracket; 10 per cent in the Rs 600,001-Rs 900,000 bracket; 15 per cent in Rs 900,001-Rs 1,200,000; 20 per cent in Rs 1,200,001-1,500,000; and 30 per cent on above Rs 1,500,000. Besides, salaried persons and pensioners can also claim a standard deduction of Rs 50,000.This was much better than the 2020-21 package. Under it, a person with an annual income of say Rs 1,500,000 needs to pay Rs 140,000 as tax when compared to Rs 150,000 payable under the old regime albeit with tax breaks. Besides, the former left the person with cash-in-hand of Rs 1,360,000 against only Rs 975,000 under the old regime (after paying tax Rs 150,000 and investment Rs 375,000). Furthermore, under the new (modified) regime a salaried person won’t have to pay any tax on annual income up to Rs 750,000.In the Budget for 2024-25, the FM has further tweaked the slabs to provide for nil tax on income up to Rs 300,000; 5 per cent tax on income in the Rs 300,001- Rs 700,000 bracket; 10 per cent in the Rs 700,001-Rs 1000,000 brackets; 15 per cent in Rs 1000,001- Rs 1,200,000; 20 per cent in Rs 1,200,001-1,500,000; and 30 per cent on above Rs 1,500,000. Besides, salaried persons and pensioners can now claim a standard deduction of Rs 75,000.For a person with an annual income of Rs 1,500,000, these changes will yield an incremental savings of Rs 15,000 over the tax payable as per the 2023-24 budget. She will need to pay only Rs 125,000 as tax. Moreover, a salaried person won’t have to pay any tax on annual income up to Rs 825,000 up from Rs 750,000 earlier.  Already, nearly two-thirds of those filing IT returns have shifted to the new tax regime.

The additional sweetener from the 2024-25 budget will incentivize more persons to shift.  Coming to CGT, the subsisting tax rates varied widely depending on the asset such as equity shares, bonds, physical assets, listed or unlisted, holding period, etc. This was prone to arbitrage/misuse, evasion and protracted litigation.Last year, the government began the process of reforming it. In the Finance Bill, 2023 passed by the Lok Sabha on March 24, 2023, it amended to change the tax treatment of capital gains from non-equity or debt mutual funds (DMF). DMF is a scheme that invests in fixed-income instruments, such as corporate and government bonds, corporate debt securities, money market instruments etc. that offer capital appreciation.

Earlier, any capital gain on redemption of units in a debt fund held for three years or longer was treated as long-term capital gain (LTCG) and taxed at a flat 20 per cent with the benefit of indexation (it adjusts the cost of a person’s investment to account for inflation, effectively reducing her capital gains and in turn, her tax liability). Any capital gain on redemption of units before three years was treated as short-term capital gain (STCG) and taxed at an individual’s income tax (albeit personal) slab rate.

The amendment dispensed with this distinction in the case of ‘Specified mutual funds’ (SMFs) which essentially refer to mutual funds where not more than 35 per cent of their total proceeds are invested in equity shares of domestic companies. As a result, gains arising from SMFs irrespective of the period for which the units are held by investors are deemed STCGs and hence, liable to tax at the rate applicable to the slab in which their total income falls.

The new tax treatment effective from April 1, 2023, also applied to exchange-traded funds (ETFs), gold funds, outbound mutual funds equity funds etc.In the budget for 2024-25, the FM has gone for a major overhaul of the CGT regime. For all categories of assets – financial or physical, listed or unlisted – except debt and non-equity MFs and unlisted bonds, long-term capital gains (LTCG) will attract tax at a uniform rate of 12.5 per cent. The holding period for deciding long-term is 24 months except in the case of stocks, equity mutual funds and REITs/InVITs where the threshold is 12 months. In the case of debt and non-equity MFs and unlisted bonds, the gains will be taxed at the applicable slab rate.     For assets held for less than 24 months, short-term capital gains (STCG) will be taxed at the applicable slab rate. However, in the case of stocks, equity mutual funds, listed bonds and REITs/InVITs, the STGC will be taxed at 20 per cent. This is up from 15 per cent levied earlier. Pertinently, for these instruments, even the LTCG tax of 12.5 per cent is higher than the 10 per cent levied earlier.Three broad messages emanate from these changes.

First, these reward long-term investors who will now pay LTCG of 12.5 per cent down from 20 per cent or the applicable slab rate (generally 39 per cent) earlier depending on the asset class. A higher annual exemption limit of Rs 125,000 (up from the existing Rs 100,000) from LTCG from stocks and equity MFs is an added sweetener.Second, while reducing the LTCG tax rate, FM has taken away the benefit of indexation.

This way she has plugged a major source of revenue loss in the real estate sector whereby developers could drastically reduce the tax outgo by taking advantage of indexation. However, owners of old houses acquired before 2001 (ancestral property) have been spared as they will continue to get indexation benefits. Third, investors looking for short-term gains pay more as the STCG tax rate on stocks and equity mutual funds now is 20 per cent up from 15 per cent earlier.

These persons being mostly rich persons/high net-worth individuals with surplus funds, Sitharaman’s endeavour to collect more tax from them is fully justified.The new CGT regime is undoubtedly a big improvement. However, the government should aim at a structure where irrespective of the asset class, listed or unlisted and the holding period, the capital gains arising therefrom are an addition to her income in the relevant year. Therefore, tax should be levied at the rate applicable to the slab his total income falls in (all sources put together).      

(The writer is a policy analyst; views are personal)