From capital gains tax to job creation, understanding Union Budget 2024

Budget 2024: While some of the announcements were on expected lines, many have led to a surprise among investors

In her record seventh budget as finance minister, Nirmala Sitharaman focussed on fiscal consolidation and job creation and tweaked the income tax regime for the common man. While some of the announcements were on expected lines, many have led to a surprise among investors.

Capital gains tax hiked

FM Sitharaman hiked the tax rate for equity investments held for less than one year to 20 per cent from 15 per cent. For shares held for more than 12 months, the long-term capital gains tax has been raised to 12.5 per cent from 10 per cent.

She also announced a hike in the Securities Transaction Tax (STT) on futures and options (F&O) securities by 0.02 per cent and 0.1 per cent, respectively. This led to a sharp reaction from the market, which dropped 400 points just after the announcement.

 

Sandeep Chilana, managing partner at CCLaw, said, “In past few years, substantial investments have been made by retail investors in financial markets. Change in rates of tax will likely have significant impact on the sentiments of retail investors with respect to consistency in tax policy and doubt that even higher taxes may be imposed in future."

Stayed on course of fiscal consolidation

Sitharaman stayed on the course of fiscal consolidation, lowering the fiscal deficit target for 2024-25 to 4.9 per cent from 5.1 per cent in the interim budget. She also said the Centre would aim to take this to 4.5 per cent in 2025-26.

Most experts had suggested that the fiscal deficit would likely be kept unchanged at 5.1 per cent, but the reduction may be due to record receipts.

"The government is proactively trying to bring down the level of excess expenditure that it had to undertake as a part of the response to the pandemic. This is a confidence-infusing move for the global investor community and likely to give a further boost to fund inflows, especially in the fixed income markets," said Rishi Shah, partner, Grant Thornton Bharat.

Abolition of angel tax

Addressing one of the long-standing demands of Indian startups, the Centre announced that the angel tax would no longer be applicable. She said that this tax would be removed for all classes of investors.

Angel tax is levied on the capital raised via the issue of shares by unlisted companies from an Indian investor if the share price of issued shares is seen as more than the fair market value of the company. The excess realisation is considered income and, therefore, taxed accordingly. Currently, it is taxable at around 30 per cent.

Tushar Aggarwal, co-founder at Tattvam Group, said, "It is a welcome step and the same will help the investor community apart from boosting the startup ecosystem."

Tweaking the income tax regime, hiking standard deduction

One of the most important announcements was the hike in the standard deduction for salaried employees to Rs 75,000 from Rs 50,000 under the new income tax regime in 2024-25. The deduction limit was raised to 14 per cent from 10 per cent for employers' contributions to the National Pension System (NPS).

The finance minister said that salaried employees under the new tax regime would save up to Rs 17,500 annually in taxes due to the changes proposed in the FY25 budget.

Sitharaman also proposed new income tax slabs: nil for income up to Rs 3 lakh, 5 per cent for income between Rs 3-7 lakh, 10 per cent for Rs 7-10 lakh, 15 per cent for Rs 10-12 lakh, 20 per cent for Rs 12-15 lakh, and 30 per cent for income above Rs 15 lakh.

She also said that a comprehensive review of the Income-tax Act, 1961 will be undertaken to make it "concise" and "easy to understand."

Support to the private sector for job creation

Sitharaman also introduced three schemes for employment-linked incentives, targeting the recognition of first-time employees and providing support to employers.

She said the Centre would allocate Rs 2 trillion to create jobs over the next five years. To spur employment, it will roll out incentives for companies, including those in manufacturing, along with programmes to improve skills and provide subsidised loans for higher education, Sitharaman added.

India's official unemployment rate in urban areas is 6.7 per cent, but the private agency, the Centre for Monitoring Indian Economy, pegs it higher at 8.4 per cent.

The announcements also include special hostels for women employees.