Union Budget 2024-25 Impact on Personal Finance and Investors - Good , Neutral and Negative Impact

The Union Budget for FY 2024-25 presented by FM Smt. Nirmala Sitharaman has had a Positive , Neutral and Negative impact on our Personal Finances and Investments.

 

Here is a Summary of Changes in Capital Gain Taxation:

       Positive Negative  Neutral 

 

 Positive Impact of Budget 2024-25:  

1.   Changes in Income tax slab (New tax regime) :

• The government announced a modest increase in Standard Deduction to Rs 75,000 from Rs 50,000 and made some tweaks to the tax slabs.

 

• Revised Tax slabs on income under new tax regime are as follows:

 

Income Range	Tax Rate
Rs 0 - Rs 3,00,000	Nil
Rs 3,00,001 to Rs 7,00,000	5%
Rs 7,00,001 to Rs 10,00,000	10%
Rs 10,00,001 to Rs 12,00,000	15%
Rs 12,00,001 to Rs 15,00,000	20%
Above Rs 15 Lakhs	30%

 

• With these changes in tax slabs and Standard Deduction, salaried employees with income more than Rs.10.75 lakhs will now save up to Rs 17,500 under the new tax regime

 

• Old tax regime will be attractive if your income is more than Rs.15 lakhs and you have total deductions of more than Rs.4.75 lakhs. Otherwise, the new tax regime will be attractive.

 

2. The exemption on Long term capital gain in equities have been increased from Rs.1 lakh to Rs.1.25 lakhs which favors equity investors.

3. Taxation on Physical Gold , Gold funds / Gold ETF, have become attractive.

 

• Capital gain taxation on physical gold , gold funds and Gold ETFs have been slashed to 12.5% from earlier 20% with indexation OR slab rates depending upon date of investment & redemption within 31^st Mar-2025.
• Holding period for physical gold has also reduced from 36 months to 24 months for LTCG.
• Tax reduction is positive for long term investors in Gold.

   4.Taxation on Overseas funds have become attractive i.e. to 12.5% from       earlier 20% with indexation.

5. Investors who hold foreign stocks either via investments or through ESOPs have to pay lesser tax  (i.e.12.5%) going forward when they sell . If their investments / ESOPs appreciate more than 10% pa, there is POSITIVE impact due to lesser tax rates.

 

6.NPS employer contribution deductions expanded:

 

• As per budget announcement, now employer contributions upto 14% of Basic Salary + DA will be available for deduction & it was earlier 10%. This is available under even new tax regime.
• This was earlier available for state & central govt employees and now it is extended to PSU & Private sector employees also

 7.TCS credit against TDS on salary for employees added. This will benefit those who transact more than Rs.7 lakhs for foreign tours & even investing abroad. This will address the cash flow mismatches which prevail now.

8. Penalty removed for the non-disclosure of foreign stocks holdings to the extent of Rs.20 lakhs valuation. Earlier, there was a penalty upto Rs.10 lakhs under Black money act 2015. This is a relief for Indian employees working in MNCs & deputed abroad.

 

The Neutral impact of Budget 2024 - 25:

 

1. Though Indexation benefits on debt MF investments done prior to 1^st April-2023 have been removed , this impact is marginal since the tax rates have been reduced to 12.5% from 20%.
2. Impact on Gold customs duty - Though customs duty has been reduced by 9% which has caused Gold prices to dip, this overall impact is marginal since the tax rates have been reduced to 12.5% from 20%.

•  Govt has reduced customs duty on Gold from 15% to 6%.
• This reduction in customs duty was part of the debate for past two years due to a greater number of incidents of gold smuggling.
• We have also earlier highlighted about the risk of customs duty (either increasing or decreasing) at multiple avenues since Govt drives the gold prices on both direction via Customs duty.
• This 9% reduction in duty will impact the gold prices to come down in rupee term and subsequently on SGB, Gold ETF, gold funds etc.

 The Negative impact of Budget 2024 - 25

 Increase in STCG & LTCG rates on equity increases investor tax burden and is sentimentally negative for markets.  But we saw that the impact is marginal (i.e 5% additional tax in STCG & 2.50% additional tax in LTCG) with the current buoyancy in the Indian stock markets.

 TDS of 10% added on interest income from Government securities.

 STT on futures increased from 0.0125% to 0.02%, and on options, it has been increased from 0.0625% to 0.1%.

 Changes in Real estate taxation – higher tax if returns are lower than 10%:

• Indexation benefit has been removed.
• Tax rates have been reduced from 20% to 12.5%.
• The holding period for long-term gains remains at 2 years.
• These changes become effective immediately (subject to passing off finance bill in parliament without any changes).
• The properties bought before year 2001, the guidance value @ 2001 must be considered as a base.

 

The Following are a sample calculation if properties were bought in 2004 i.e.  20 years  back

 

 

 

Our View:

•  There is reduction in tax rate as well as removal of indexation benefit in Real estate properties.
• The outcome of these changes has a mixed bag impact.
• In case of properties bought more than 15-20 years back or ancestral property & if the returns from such properties are more than 10% CAGR, there is NO impact due to removal of indexation benefit.
• If the returns on  real estate properties are LOW  i.e. around 6%-8% pa and in these cases, the impact of removal of indexation benefits are substantially high & investors have to pay more taxes which is negative impact.  
• As per these changes, real estate Investors who earn higher returns will have to pay lesser taxes and meanwhile, those who got low or minimal returns, must shell out relatively more taxes and this looks illogical.
• The table below as per the Housing Price Index across the major cities in India as of Sept 2023 shows that overall Real Estate investments have given below 10% returns
• Overall, the impact needs to be analysed on case-to-case basis as per your property’s purchase date, cost of acquisition and sale price etc. However, as per data available across metro & Tier II cities, The Real estate returns have been lower than 8%. Hence, it is major negative impact for most investors.  

       Source: Link to the article

 

 Conclusion:

 

1. Capital gains tax structure has been rationalized to equalize tax impact on asset classes to remove tax arbitrage which is good and simplifies the tax filing process.
2. Holding periods consolidated to only 2 periods across asset classes to calculate long term capital gains i.e.12 months for listed securities & 24 months for remaining all assets which again simplifies the tax filing process.
3. Long term capital gain tax has been slashed to “12.5% without indexation” from “20% with indexation” across asset classes. Here, the impact is a mixed bag and is depending upon the “returns of respective asset classes”. If any assets earn more than 10% return, there is positive impact and If any assets around 8% or lower, the impact is negative, and this seems illogical and needs review .