Budget 2024-25: Changes under the Income Tax Law

Direct Tax

India is growing at an accelerated pace, and people are undertaking multiple financial transactions. The Income Tax Department has established a robust framework for reporting taxpayers' transactions.

The provisions of the Finance (No. 2) Bill, 2024 (hereafter referred to as 'the Finance Bill'),relating to direct taxes seek to amend the Income-tax Act, 1961 (hereafter referredto as 'the Act'), to continue reforms in the direct tax system through tax reliefs, removing difficulties faced by taxpayers, and rationalizing various provisions.

With a view to achieving the above, the various proposals for amendments are organized under the following headings:

• Rates of income tax;
• Measures to promote investment and employment;
• Simplification and Rationalization
• Widening and deepening of the tax base and anti-avoidance;
• Tax administration;

The following amendments have been proposed under Income Tax Laws in the Finance Bill, 2024, vide Clauses 2 to 87, which shall, save as otherwise provided in the Finance (No. 2) Act, 2024, be deemed to have come into force on April 1, 2024, as per Clause 1(2)(a) of the Finance Bill, 2024:

1. Revision of Tax Slabs for Personal Income Tax in the New Tax Regime u/s 115 BAC

The current tax rates in the New Tax Regime u/s 115 BAC are as follows:

With effect from assessment year 2025–26, it is proposed that the following rates be provided under the proposed clause (ii) of sub-section (1A) of Section 115BAC of the Act:

As a result of these changes, a salaried employee in the new tax regime stands to save up to ₹ 17,500 in income tax.

2. Increase of standard deduction for salaried persons from Rs. 50,000/- to Rs. 75,000/-

The existing provision of clause (ia) of Section 16 of the Act provides that a deduction of fifty thousand rupees or the amount of the salary, whichever is less, shall be made before computing the income under the heading "Salaries.".

It is proposed to insert a proviso after clause (ia) of Section 16 to provide that in a case where income tax is computed under clause (ii) of sub-section (1A) of Section 115BAC of the Act, the provisions of this clause shall have effect as if for the words "fifty thousand rupees,"  the words "seventy five thousand rupees" had been substituted.

This amendment will take effect on April 1, 2025, and will accordingly apply to assessment years 2025–26 and subsequent assessment years.

3. Increase in a deduction from family pension for taxpayers from Rs. 15,000/- to Rs. 25,000/-

The existing provision of clause (iia) of Section 57 of the Act provides that in the case of income in the nature of a family pension, a deduction of a sum equal to thirty-three and one-third percent of such income or fifteen thousand rupees, whichever is less, shall be made before computing the income chargeable under the heading "Income from other sources.".

It is proposed to insert a proviso in clause (iia) of Section 57 to provide that in a case where income tax is computed under clause (ii) of sub-section (1A) of Section 115BAC of the Act, the provisions of this clause shall have effect as if for the words "fifteen thousand rupees,"  the words "twenty-five thousand rupees" had been substituted.

This amendment will take effect on April 1, 2025, and will accordingly apply to assessment years 2025–26 and subsequent assessment years.

4. Increase in the amount allowed as a deduction to non-government employers and their employees for employer contribution to a pension scheme referred to in Section 80CCD from 10% to 14%

Clause (iva) of sub-section (1) of Section 36 states that any sum paid by the assessee as an employer by way of contribution towards a pension scheme, as referred to in Section 80CCD of the Act, on account of an employee, to the extent it does not exceed ten percent of the salary of the employee in the previous year, shall be allowed as a deduction to the employer.

It is proposed to amend clause (iva) of sub-section (1) of Section 36 of the Act to increase the amount of employer contribution allowed as deduction to the employer from the extent of 10% to the extent of 14% of the salary of the employee in the previous year.

Further, Section 80CCD deals with deductions with respect to contributions to the pension scheme of the Central Government. Sub-section (2) of Section 80CCD states that any contribution by the Central Government, State Government, or any other employer to the account of an employee referred to in sub-section (1) shall be allowed as deduction as does not exceed

(a) 14% (where such contribution is made by the Central Government or State Government); and

(b) 10% (where such a contribution is made by any other employer) of the employee's salary in the previous year.

It is proposed to amend sub-section (2) of Section 80CCD of the Act to provide that where such a contribution has been made by any other employer (not being the Central Government or State Government), the employee shall be allowed as a deduction an amount not exceeding 14% of the employee's salary.

This is being increased only in the case where the employee's salary is chargeable to tax under sub-section (1A) of Section 115BAC of the Act.

These amendments will take effect on April 1, 2025, and will accordingly apply from the assessment year 2025–2026 onwards.

5. Reduction of corporate tax rate applicable to foreign companies from 40% to 35%

In the case of a company other than a domestic company, it is proposed that the rates of tax be reduced from 40% to 35% on income other than income chargeable at special rates, as specified in the respective sections of Chapter XII of the Act.

6. Angel Tax to be abolished by April 1, 2025

In the 2012 Finance Act, a new clause (viib) was inserted in sub-section (2) of section 56 to provide that where a company, not being a company in which the public is substantially interested, receives, in any previous year, from any person being a resident, any consideration for the issue of shares, if the consideration received for the issue of shares exceeds the face value of such shares, the aggregate consideration received for such shares exceeding such a fair market value shall be chargeable to income tax under the heading "Income from other sources.".

It has been decided by the government to set the provisions of clause (viib) of sub-section (2) of Section 56 of the Act. Consequent to the said decision, an amendment to clause (viib) of sub-section (2) of Section 56 of the Act is being carried out to provide that the provisions of this clause shall not apply from the assessment year 2025–26.

This amendment is proposed to be made effective from April 1, 2025, and shall accordingly apply from assessment years 2025–26.

7. Promotion of Domestic Cruise Ship Operations by Non-Residents

Certain amendments have been proposed to promote the cruise-shipping industry in India. The aim is to make India an attractive cruise tourism destination, to attract global tourists to cruise shipping in India, and to popularize cruise shipping with Indian tourists. The participation of international cruise-ship operators in this sector will encourage the development of this sector and enable access to international best practices.

8. Charitable Trust: Merger of trusts under the first regime with the second regime

The Act puts in place two main regimes for trusts, funds, or institutions to claim exemption. As both regimes intend to grant similar benefits, the procedures and conditions across the two regimes have been aligned over the last few years through successive Finance Acts. In order to continue the process of simplification of procedures and reduce administrative burden, it is proposed that the first regime be sunsetted and trusts, funds, or institutions be transferred to the second regime in a gradual manner.

These amendments will take effect on October 1, 2024.

9. Rationalization and Simplification of Taxation of Capital Gains Holding Period

It has been proposed that there will only be two holding periods, 12 months and 24 months, for determining whether the capital gains are short-term capital gains or long-term capital gains.

• For all listed securities, the holding period is proposed to be 12 months, and for all other assets, it will be 24 months. Accordingly, an amendment is proposed in clause (42A) of Section 2 of the Act.
• Thus, units of listed business trusts will now be on par with listed equity shares at 12 months instead of 36 months earlier.
• The holding period for bonds, debentures, and gold will reduce from 36 months to 24 months.
• For unlisted shares and immovable property, it shall remain for 24 months.

These proposals are proposed to be given effect immediately, i.e., with effect from July 23, 2024.

10. Rationalization and simplification of taxation of short-term capital gains

The rate for short-term capital gain under the provisions of Section 111A of the Act on STT-paid equity shares, units of equity-oriented mutual funds, and units of a business trust is proposed to be increased to 20% from the present rate of 15%.

Other short-term capital gains shall continue to be taxed at the applicable rate.

These proposals are proposed to be given effect immediately, i.e., with effect from July 23, 2024.

11. Rationalization and simplification of taxation of long-term capital gains

The rate of long-term capital gains under the provisions of various sections of the Act is proposed to be 12.5% with respect to all categories of assets. This rate earlier was 10% for STT-paid listed equity shares, units of equity-oriented funds, and business trusts under Section 112A, and for other assets, it was 20% with indexation under Section 112.

However, an exemption of gains up to 1.25 lakh (aggregate) is proposed for long-term capital gains under Section 112A on STT-paid equity shares, units of equity-oriented funds, and business trusts, thus increasing the previously available exemption of up to 1 lakh of income from long-term capital gains on such assets.

For bonds and debentures, the rate for taxation of long-term capital gains was 20% without indexation. For listed bonds and debentures, the rate will be reduced to 12.5%. Unlisted debentures and unlisted bonds are of the nature of debt instruments, and therefore any capital gains on them should be taxed at the applicable rate, whether short-term or long-term.

Thus, unlisted debentures and unlisted bonds are proposed to be brought to tax at applicable rates by including them under the provisions of Section 50AA of the Act. This amendment to Section 50AA shall come into effect on July 23, 2024.

Indexation Benefit will no longer be available.

Simultaneously, with the rationalization of the rate to 12.5%, indexation available under the second proviso to Section 48 is proposed to be removed for the calculation of any long-term capital gains, which are presently available for property, gold, and other unlisted assets. This will ease the computation of capital gains for the taxpayer and the tax administration.

These proposals are proposed to be given effect immediately, i.e., with effect from July 23, 2024.

12. Revision of Rates of Securities Transaction Tax ("STT")

Presently, the rate of levy of STT on the sale of an option in securities is 0.0625% of the option premium, while the rate of levy of STT on the sale of a future insecurities is 0.0125% of the price at which such "futures" are traded.

The rate of levy of STT on delivery trades in equity shares is 0.1% on both purchase and sale transactions, while in the case of the sale of an option in securities where the option is exercised, the rate of levy is 0.125% of the intrinsic price (i.e., the difference between the settlement price and the strike price) and is payable by the purchaser.

There has been an exponential growth of derivative (future and option) markets in recent times, and trading in such derivatives accounts for a large proportion of trading on stock exchanges. In view of this exponential growth of the derivative markets, it is proposed to increase the said rates of securities transaction tax on the sale of an option in securities from 0.0625% to 0.1% of the option premium and on the sale of a futures in securities from 0.0125% to 0.02% of the price at which such "futures" are traded.

This amendment is proposed to be made effective on October 1, 2024.

13. Rationalization of Tax Deducted at Source ("TDS") Rates

To improve ease of doing business and better compliance by taxpayers, the following TDS rates are proposed to be reduced:

14. Ease in claiming credit for TCS collected or TDS deducted by salaried employees

Section 192 of the Act provides for the deduction of tax at source on salary income. Further, sub-section (2B) of Section 192 of the Act provides for consideration of income under any other head and tax, if any, deducted thereon to be taken into account for the purposes of making the deduction under sub-section (1) of the aforesaid section, subject to certain conditions.

Representations have been received that the credit of TCS paid should be allowed while computing the amount of tax to be deducted from the salary income of the employees, as this will help in avoiding cash flow issues for employees. Similarly, all TDS may be taken into account for the purpose of deducting tax from the salary income of employees. Moreover, when the TCS, etc., is not taken into account, the same is required to be claimed as a refund by the employee, which adds to the compliance process.

In order to ease compliance, it is proposed that sub-section (2B) of section 192 may be amended to expand the scope of the said sub-section to include any tax deducted or collected under the provisions of Chapter XVII-B or Chapter XVII-BB, as the case may be, to be taken into account for the purposes of making the deduction under sub-section (1) of section 192.

The amendments will take effect on October 1, 2024.

15. Increase in the limit of remuneration to working partners of a firm is allowed as a deduction

Section 40 of the Act provides for amounts that shall not be deducted in computing the income chargeable under the heading "Profits and gains of business or profession.".

Sub-clause (v) of clause (b) of the said section provides for disallowance of any payment of remuneration to any partner who is a working partner that is authorized by and is in accordance with the terms of the partnership deed and relates to any period falling after the date of such a partnership deed in so far as the amount of such payment to all partners during the previous year exceeds the aggregate amount computed as hereunder:

This limit was put in place in the statute w.e.f. AY 2010-11. It is now proposed to amend the limit of remuneration to working partners in a partnership firm, which is allowed as a deduction as follows:

The amendments to sub-clause (v) of clause (b) of Section 40 of the Act will take effect on April 1, 2025, and will, accordingly, apply in relation to assessment years 2025–2026 and subsequent years.

16. Tax on Recipient on Distributed Income of Domestic Company for Buy-Back of Shares

The sum paid by a domestic company for the purchase of its own shares shall be treated as a dividend in the hands of shareholders who received payment from such a buyback of shares and shall be charged to income tax at applicable rates.

No deduction for expenses shall be available against such dividend income while determining the income from other sources.

The cost of the acquisition of the shares that have been bought back would generate a capital loss in the hands of the shareholder as these assets have been exhausted.

Therefore, when the shareholder has any other capital gain from the sale of shares or otherwise, he would be entitled to claim his original cost of acquisition of all the shares (i.e., the shares earlier bought back plus the shares finally sold). It shall be computed as follows:

(i) deeming the value of consideration of shares under buyback (for purposes of computing capital loss) as nil;

(ii) allowing capital loss on buy-back, computed as the value of consideration (nil) less the cost of acquisition;

(iii) allowing the carryforward of this as capital loss, which may subsequently be set off against consideration received on sale and thereby reduce the capital gains to this extent.

These amendments will take effect on October 1, 2024, and will accordingly apply to any buyback of shares that takes place on or after this date.

17. TDS u/s 194T @ 10% on payment of salary, remuneration, interest, bonus, or commission of more than Rs. 20,000/- by partnership firm to partners

It is proposed that a new TDS section 194T may be inserted to bring payments such as salary, remuneration, commission, bonus, and interest to any account (including the capital account) of the partner of the firm under the purview of TDS for aggregate amounts greater than Rs 20,000 in the financial year.

The applicable TDS rate will be 10%.

The provisions of Section 194T of the Act will take effect on April 1, 2025.

18. TCS under sub-section (1F) of Section 206 on luxury goods

The existing provisions of Section 206C of the Act provide, inter alia, for the collection of tax at source on the business of trading in alcoholic liquor, forest produce, scrap, etc. Sub-section (1F) provides that every person, being a seller, who receives any amount as consideration for the sale of a motor vehicle of the value exceeding ten lakh rupees shall, at the time of receipt of such amount, collect from the buyer, as a sum equal to one percent of the sale consideration, as income tax.

It is proposed to amend sub-section (1F) of Section 206C to also levy TCS on any other goods of value exceeding ten lakh rupees, as may be notified by the Central Government on this behalf. Such goods would be in the nature of luxury goods.

The amendment will take effect on January 1, 2025.

19. Exclusion of certain sums under Section 194J (Payment to Professionals) from Section 194C (Payment to Contractors)

Section 194C of the Act provides for TDS on payments to contractors at the rate of 1% when the payment is being made or credit is being given to an individual, or 2% in other cases.

Section 194J of the Act relates to TDS on fees for professional or technical services, wherein the applicable TDS rates are 2% or 10%, depending on the nature of the payment being made.

Clause (iv) of the explanation of Section 194C defines "work" to specify which activities would attract TDS under Section 194C. However, there is no explicit exclusion of assessees who are required to deduct tax under Section 194J from the requirement or ability to deduct tax under Section 194C of the Act. Therefore, some deductors are deducting tax under Section 194C of the Act when, in fact, they should be deducting tax under Section 194J of the Act.

In view of the above, it is proposed to explicitly state that any sum referred to in sub-section (1) of section 194J does not constitute "work" for the purposes of TDS under section 194C.

The amendment will take effect on October 1, 2024.

20. The Direct Tax Vivad Se Vishwas Scheme is to be launched

The provisions pertaining to the Direct Tax Vivad se Vishwas Scheme, 2024, are covered under clauses 88 to 99 of the Finance Bill, 2024.

The pendency of litigation at various levels has been on the rise due to the larger number of cases going for appeal than the number of disposals. Keeping in view the success of the previous Vivaad Se Vishwas Act, 2020, and the mounting pendency of appeals at the CIT (A) level, the introduction of a Direct Tax Vivaad Se Vishwas Scheme, 2024, is proposed with the objective of providing a mechanism of settlement of disputed issues, thereby reducing litigation without much cost to the exchequer.

The Direct Tax Vivad se Vishwas Scheme, 2024, is envisaged to provide relief to the taxpayer with respect to his disputed tax arrears if such arrears are paid in the manner specified in the scheme. The scheme seeks to provide relief by granting immunity from the initiation of proceedings in respect of tax offenses and the imposition of penalties in certain cases.

It is proposed that this scheme shall come into force from the date to be notified by the Central Government. The last date for the scheme is also proposed to be notified.

21. Withdrawal of Equalization Levy

The scope of the 2% equalization levy is ambiguous and leads to a compliance burden. Therefore, it is proposed that this equalization levy at the rate of 2% shall not be applicable to consideration received or receivable for e-commerce supply or services on or after the 1st day of August, 2024.

Any service that was liable to an equalization levy was exempt in sub-section (50) of Section 10, subject to certain conditions.

Consequently, as the 2% levy is being made inapplicable, it is proposed that income arising from e-commerce supply or services made, provided, or facilitated on or after the 1st day of April, 2020, but before the 1st day of August, 2024 only, shall fall within the ambit of clause (50) of Section 10 of the Act.

These amendments will take effect on August 1, 2024.

22. Amendment in Section 276B of the Act w.r.t. decriminalization of provisions

Section 276B of the Act provides for prosecution in case of failure to pay tax to the credit of the Central Government under Chapters XII-D or XVII-B. The provisions of the said section state that, inter alia, if a person fails to pay, to the credit of the Central Government, the tax deducted at source by him as required by or under the provisions of Chapter XVII-B, he shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years and with a fine.

It is proposed to amend Section 276B of the Act to provide for exemption from prosecution for a person covered under clause (a) of the said section if the payment of tax deducted in respect of a quarter has been made to the credit of the Central Government at any time on or before the time prescribed for filing the statement of such quarter under sub-section (3) of Section 200 of the Act.

This amendment will take effect on October 1, 2024.

23. Introduction to Block Assessment Provisions in cases of search under Section 132 and requisition under Section 132A

In order to make the procedure of assessment of search cases cost-effective, efficient, and meaningful, it is proposed to introduce the scheme of assessment for the cases in which a search under Section 132 or a requisition under Section 132A has been initiated or made. The main objectives for the introduction of this scheme are early finalization of search assessments, coordinated investigation during search assessments, and reduction in the multiplicity of proceedings.

This amendment will take effect on September 1, 2024.

24. Rationalization of provisions relating to assessment and reassessment under the Act

It is proposed to thoroughly simplify the provisions for reopening and reassessment. An assessment can be reopened beyond three years from the end of the assessment year only if the escaped income is Rs. 50 lakh or more, up to a maximum period of five years from the end of the assessment year.

Even in search cases, a time limit of six years before the year of search, as against the existing time limit of ten years, is proposed.

This amendment will take effect on September 1, 2024.