Simpler capital gains tax regime highlight of Budget
The administration of the income-tax department is in a poor shape today. Taxpayer appeals have piled up for the past five years with zero accountability by the tax department
 "Simpler capital gains tax regime highlight of Budget")
This Budget has a lot of provisions, but my focus is on some of the items I think will have a significant impact on the middle class.
The biggest positive I see is the continuity in the steps taken to reduce the misselling of insurance policies by the banks. The Economic Survey had identified this as a major risk factor. The goods and services tax (GST) department has done its bit by imposing hefty penalties on input credit claimed on expense invoices that were used to disguise the extra commission paid.
The Insurance Regulatory and Development Authority (Irdai) has bought in special surrender value provisions that have reduced the incentive for misselling. Now, the Finance Bill proposes to disallow such expenses claimed by insurers that reduce their taxable profits. Hopefully, a reduction in misselling will follow from this barrage of steps. There are a number of steps taken that will leave more money in the hands of the taxpayers. These include the reduction in tax rates under the new tax regime (NTR), increase in standard deduction, allowing tax collected at source (TCS) to be adjusted against tax deducted at source (TDS) from salaries. Those who needed to pay advance tax (mainly businesspersons) already enjoyed this facility. Now, the salaried class can also reduce the rigour of the TCS provisions. Also the Budget proposes a reduction in TDS rates on rent, commission and brokerage, and many other income sources.
The Insurance Regulatory and Development Authority (Irdai) has bought in special surrender value provisions that have reduced the incentive for misselling. Now, the Finance Bill proposes to disallow such expenses claimed by insurers that reduce their taxable profits. Hopefully, a reduction in misselling will follow from this barrage of steps. There are a number of steps taken that will leave more money in the hands of the taxpayers. These include the reduction in tax rates under the new tax regime (NTR), increase in standard deduction, allowing tax collected at source (TCS) to be adjusted against tax deducted at source (TDS) from salaries. Those who needed to pay advance tax (mainly businesspersons) already enjoyed this facility. Now, the salaried class can also reduce the rigour of the TCS provisions. Also the Budget proposes a reduction in TDS rates on rent, commission and brokerage, and many other income sources.
Removal of indexation will substantially increase the tax payable on real estate that has been held for a long time. There is a significant extra deduction under NTR that is available for employer contribution (from private employers) to NPS at 14 per cent of basic. NPS must get its act together on ease of administration as well as availability of balanced funds (both conservative and aggressive) that are the mainstay of any retirement fund. The old tax regime (OTR) is likely to be history soon with very few people availing of it.
The rise in securities transaction tax (STT) on futures & options (F&Os) along with the steps likely to be taken by Sebi is likely to deflate the F&O bubble to some extent. The Budget’s highlight is the simplification of capital gains taxation. The holding period for qualifying for long-term assets has been simplified at one year for listed securities and two years for everything else.
Capital gains tax rates are now simple. Long-term capital gains (LTCG) tax is standardised at 12.5 per cent (without indexation) on all assets other than Debt Mutual Funds (DMF)-defined as mutual funds investing over 65 per cent in debt or money market instruments.
Short-term capital gains (STCGs) tax on listed equities/equity-oriented mutual is now 20 per cent, instead of 15 per cent earlier. STCG tax on all other assets (except DMF) is payable on applicable tax rates. On DMF, capital gains tax is payable on applicable tax rates irrespective of whether they are short term or long term.
Thankfully, the error made in Budget 2023 that clubbed gold funds and Fund of Funds and International Funds with DMF has been corrected and they will now pay 12.5 per cent LTCG tax. The incipient movement by discerning investors towards Fund of Funds will now resume its march as it allows an automatic rebalancing of their asset classes.
The administration of the income-tax department is in a poor shape today. Taxpayer appeals have piled up for the past five years with zero accountability by the tax department. Digitalisation and initiatives like the Vivad se Vishwas scheme cannot work in isolation. The tax department needs to have an enforceable taxpayer’s charter that involves them paying penalties for delays from their side and its recovery from the concerned tax officials.
The writer heads Fee-Only Investment Advisors LLP, a Sebi-registered investment advisor