Major Amendments to Income Tax Rules in Union Budget 2024

January 2, 2025

The Union Budget 2024 introduced by the Indian government has brought substantial changes to the income tax rules, significantly impacting income tax return (ITR) filing for the financial year 2024-25. Designed to provide taxpayers with relief and streamline the tax process, these amendments encompass various areas such as revised tax slabs, increased deduction limits, new provisions for capital gains taxation, and updates on tax collection at source (TCS) and tax deduction at source (TDS). Taxpayers are likely to benefit from these amendments, but will need to stay informed to optimize their tax planning.

New Income Tax Slabs

The government has restructured the income tax slabs under the new tax regime for the financial year 2024-25, enabling taxpayers to save more money. These changes, which can potentially save individuals up to Rs 17,500, are aimed at lowering the tax liability for various income groups, providing broader relief. By making the tax system more progressive, the new slabs ensure that higher income groups contribute their fair share, while offering substantial relief to lower and middle-income taxpayers. This restructuring is expected to increase disposable income, thereby boosting overall economic activity.

The new tax slabs are crafted to help balance the need for government revenue with the financial well-being of citizens. By lowering the effective tax rate for a larger section of the population, the government hopes to encourage consumer spending and investment. This initiative reflects an understanding of the economic pressures faced by ordinary citizens, particularly in light of recent global economic challenges. By providing financial relief through tax reductions, the government aims to stimulate economic growth while ensuring fair tax contributions across different income brackets.

Increased Standard Deduction Limit

The standard deduction limit under the new tax system has been increased from Rs 50,000 to Rs 75,000, and from Rs 15,000 to Rs 25,000 for family pensioners. This change is a significant step toward reducing the tax burden on salaried individuals and pensioners. However, it is important to note that there is no change in the standard deduction limit for individuals opting for the old tax system. The increase in the standard deduction limit offers additional financial relief, ultimately lowering taxable income and increasing savings.

This adjustment provides more room for taxpayers to claim deductions, thereby lowering their overall tax burden. Enhanced standard deductions are a key component of the government’s strategy to put more money in the pockets of middle-class taxpayers. By doing so, they aim to improve the purchasing power of individuals, which can stimulate economic growth. Additionally, this change simplifies tax calculations, making it easier for individuals to file their returns and comply with tax regulations.

Enhanced Deduction on Employer’s Contribution in NPS

To promote long-term financial security for employees, the deduction limit for an employee’s contribution to the National Pension System (NPS) has been increased from 10% to 14% under the new tax system. This change encourages more contributions towards retirement savings, providing greater tax benefits. By enhancing the deduction limit, the government aims to incentivize individuals to invest in their retirement, ensuring a stable financial future.

This move is expected to attract more employees to contribute towards the NPS, fostering a culture of saving and investing for the future. The increased deduction limit not only provides immediate tax relief but also ensures long-term benefits for individuals, helping them build a robust retirement corpus. The government’s emphasis on NPS contributions is aligned with its broader goal of promoting financial security and stability among its citizens, particularly in their post-retirement years.

New Tax Rates for LTCG and STCG

Significant revisions in the tax rates for long-term capital gains (LTCG) and short-term capital gains (STCG) have been introduced. STCG on equity and equity-oriented mutual funds will now be taxed at 20% instead of the previous 15%, which reflects a 5% increase. LTCG from any asset will be taxed at a uniform rate of 12.5%, whereas previously, different assets were taxed at varying rates. Additionally, the exemption limit for LTCG on equity and equity-oriented mutual funds has been increased from Rs 1 lakh to Rs 1.25 lakh.

These changes aim to streamline the capital gains tax rates and make them more uniform across different asset classes, which can reduce confusion and simplify compliance. The increase in exemption limits for LTCG provides additional relief to investors, encouraging long-term investments in the equity markets. By making these rates more predictable and consistent, the government hopes to foster a more transparent and investor-friendly tax environment.

Change in Holding Period for Capital Gains Taxation

Another key amendment is the streamlining of holding periods for determining whether capital gains are short-term or long-term. For all listed securities, a 12-month holding period will classify the gains as long-term. Similarly, for all non-listed securities, the holding period for long-term capital gains has been set at 24 months. This simplification aims to reduce confusion among taxpayers and ensure a more straightforward approach to capital gains taxation.

Aligning the holding periods with international standards is expected to make the Indian tax system more consistent and predictable. This change simplifies the tax computation and compliance process, making it easier for investors and tax professionals to navigate the rules. By providing clear guidelines on holding periods, the government hopes to encourage more investment in both listed and non-listed securities, ultimately contributing to the growth of the financial markets.

TCS Credit Allowed to Other Persons

An important amendment to support middle-class families allows individuals other than the collector (from whom tax is collected at source) to claim TCS credit. Effective from January 1, 2025, this change benefits parents paying tuition fees for children studying abroad, enabling them to claim TCS credit on behalf of their children. This provision reflects the government’s commitment to supporting education and easing the financial burden on middle-class families.

This amendment is anticipated to provide significant relief for families with children studying abroad by optimizing their tax credits and reducing overall tax liability. By allowing TCS credit to be transferred, the government acknowledges the financial challenges faced by families in managing overseas education expenses. This change is part of a broader effort to make tax policies more inclusive and responsive to the needs of different taxpayer groups.

TDS on RBI Floating Rate Bonds

RBI floating rate bonds have also been added to the list of financial instruments subject to TDS. If the interest earned on these bonds exceeds Rs 10,000 per month, TDS will be deducted. This inclusion aligns with the government’s broader TDS rules and ensures that interest income from these bonds is taxed at the source. This measure promotes better tax compliance and simplifies the tax process for bondholders, as the tax is deducted before they receive the interest.

By incorporating RBI floating rate bonds under TDS regulations, the government aims to ensure that all interest income is appropriately taxed, enhancing overall tax compliance. This move aligns with the broader objective of simplifying tax processes and ensuring that individuals pay their due taxes without the need for cumbersome procedures. It also reflects an effort to reduce tax evasion and ensure that all sources of income are accounted for in the tax system.

TCS on Luxury Goods

Effective from January 1, 2025, purchases of luxury goods with a value exceeding Rs 10 lakh will attract TCS (tax collected at source). While the government has yet to disclose details regarding the list of luxury goods and the applicable TCS rates, this measure aims to ensure tax compliance on high-value transactions. This initiative targets high-income consumers and luxury item purchases, ensuring that the tax liabilities for such purchases are adequately addressed.

The introduction of TCS on luxury goods is part of a broader strategy to enhance tax collection from high-value transactions. By imposing TCS on these items, the government aims to capture a larger portion of revenue from affluent consumers who engage in high-value purchases. This move is expected to contribute to increased tax revenues and ensure that luxury spending is appropriately taxed, aligning with the principle of progressive taxation.

Change in TDS on House Sale

Revised rules for TDS on the sale of property will come into effect from October 1, 2024. If the total payment for a property sale exceeds Rs 50 lakh, TDS should be deducted from the entire payment made to the seller, even if each seller’s share is less than Rs 50 lakh. This amendment seeks to enhance tax collection efficiency in property transactions, ensuring that the correct amount of tax is collected on high-value property sales.

This change in TDS rules is intended to prevent tax evasion in property transactions by ensuring that large transactions are adequately taxed. By requiring TDS to be deducted from the total payment rather than on individual shares, the government aims to close loopholes that have previously allowed for tax avoidance. This measure not only strengthens tax compliance but also simplifies the process of tax collection in the real estate sector.

Vivaad se Vishwas Scheme 2.0

The Union Budget 2024 introduced by the Indian government has brought significant changes to the income tax rules, which will have a notable impact on income tax return (ITR) filing for the financial year 2024-25. Aimed at providing relief to taxpayers and simplifying the tax process, these amendments cover diverse areas, including revised tax slabs, higher deduction limits, new provisions for capital gains taxation, and updates on tax collection at source (TCS) as well as tax deduction at source (TDS). These changes are anticipated to be beneficial for taxpayers, offering enhanced opportunities for tax savings. However, it will be essential for taxpayers to stay knowledgeable about these amendments to maximize their tax planning strategies. Being well-informed can assist in taking full advantage of the new provisions, ensuring compliance, and optimizing potential benefits from the revised rules. The Union Budget 2024’s focus on streamlining and enhancing the tax system demonstrates the government’s intent to create a more taxpayer-friendly environment.

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