By Neeraj Bhatia-
India’s Union Budget 2024 announced by India’s Finance Minister Nirmala Sitharaman July 23, has not made too many changes, especially for Non-Resident Indians(NRIs), yet NRIs planning to sell property in India will have a significant impact on their taxes.
The budget has changed the capital gains tax treatment for almost all classes of assets. The Capital Gains tax changes has brought in mixed reactions from the businesses and taxpayers – on the one hand it has been criticized for eliminating the Indexation done to the cost basis due to inflation, whereas there are many supporting it for simplifying the Capital Gains tax structure by reducing most of the Capital Gains tax rates along with eliminating the sometimes-complex indexation calculations. As a result, some of the taxpayers see a benefit, while others see a potentially higher tax due to the budget changes.
The abolition of Angel tax and changes in Tax Collection at Source (TCS) offset with Tax deducted at Source (TDS) have been welcomed as positive proposals in the budget.
Capital Gains tax proposals
Going into immediate effect and with a view to rationalizing and simplifying taxation of Capital Gains, the budget has changed the tax rates as well as holding period of both the short-term and long-term capital gains. The indexation factor used to increase the cost basis is also gone.
The budget also proposes to bring parity in Capital Gains taxation between resident and non-resident assesses.
The budget proposes that there will only be two holding periods, 12 months and 24 months, for determining whether the capital gains is short-term capital gains (STCG) or long-term capital gains (LTCG). For all listed securities (including shares and other securities), the holding period is proposed to be 12 months and for all other assets, it shall be 24 months.
The rate of LTCG is proposed to be 12.5% in respect of all categories of assets, including real estate, gold and other capital assets. This rate earlier was 10% for STT paid listed equity shares, units of equity-oriented fund and certain business trusts and for other assets it was 20% with indexation. An exemption of gains up to Rs. 1.25 lakh (aggregate) is proposed for such financial assets, increasing the previously available exemption which was up to 1 lakh of income from LTCG on such assets.
For bonds and debentures, the rate for taxation of LTCG which was 20% without indexation has been reduced to 12.5%. Unlisted debentures and unlisted bonds, whether short-term or long-term, will be taxed at the applicable regular income tax rate. It may be pertinent to mention that for the assets purchased before April 1, 2001, the fair value as of April 1, 2001, will still be the cost basis for computation of Capital Gains tax.
While LTCG rates for most of the assets have been reduced on the one hand, whereas the benefit of indexation of cost basis has been eliminated, certain taxpayers would end up paying less tax, while others would pay higher tax under the proposed changes. A reworking of Tax planning before the sale of assets might be advisable. For instance, assets which have recorded a very significant appreciation – say 10-15 times or more over the last 20 years would possibly have a lower tax in the proposed capital gains regime than under the previous Capital gains tax structure.
Since the Capital Gains in India will also be taxable in the US for US citizens and US (Tax) residents, for those planning to sell their India assets it will be imperative to do a proper tax planning to assess the impact of these changes. There are several tax saving/ deferral strategies available in India as well as in the US. For instance, to save tax in India, the taxpayer could explore the option of investing capital gains/ proceeds in the purchase of another residential property in India or in NHAI or REC Bonds. In the US stepped up basis could be used if it is an inherited property. One could also assess investment of the gains/ proceeds in Opportunity Zone or in 1031 exchange overseas, if that is possible. For US Citizens and Green Card holder living in India and selling their primary home, primary home sale exemption of $500,00 or $250,000 might also be available.
Proper tax planning would evaluate the objectives of the taxpayer vis-à-vis what tax saving/ deferral options could be availed to minimize the overall tax impact.
Rates of Income Tax
The finance minister also announced an increase in standard deduction of salaried employees from Rs.50,000 to Rs75,000, deduction on Family pension from Rs 15,000 to Rs.25,000 and revision in tax rate structure. As a result of these changes, a salaried employee in the new tax regime could save up to ₹ 17,500/- in income tax.
To improve ease of doing business and better compliance by taxpayers, the TDS (Tax Deduction of Source) rates are also proposed to be reduced from many payments – in many cases from 5% to 2%.
Benefit of TCS changes to parents/ family members of students studying outside India
In a benefit to salaried employees, TCS (Tax Collection of Source) will also to be taken into account for the purposes of calculating the TDS from the income of employees by the employers. This will particularly benefit parents and family members of students studying in the US and other countries, who are sending funds for their tuition fee, as this will help in avoiding cash flow issues for them.
Abolition of Angel Tax
To bolster the Indian start-up ecosystem, boost the entrepreneurial spirit and support innovation, the finance minister has proposed to abolish the ‘angel tax’ for all classes of investors. Angel tax, introduced in 2012, was a tax imposed at the rate of over 30% on funding raised by unlisted companies, or startups, if their valuation exceeded the company’s fair market value. It is expected that this decision will help in attracting foreign investments, promoting innovation and further strengthening the startup ecosystem of the country
Reduction of Corporate tax on foreign companies
To attract foreign capital for India’s development needs, the finance minister has proposed to reduce the corporate tax rate on foreign companies operating in India from 40 to 35 percent.
Simpler tax regime to operate domestic cruise by non-residents
The finance minister has also proposed certain amendments to promote the cruise-shipping industry in India. In this regard, a presumptive taxation regime is being put in place for a non-residents, engaged in the business of operation of cruise ships, along with exemption to income of a foreign company from lease rentals, if such foreign company and the non-resident cruise ship operator have the same holding company. Under this presumptive tax regime, it will be deemed that 20% of the aggregate amount received/ receivable by the non-resident cruise-ship operator, as profits and gains of such cruise-ship operator from this business, subject to certain prescribed conditions.
Provision of safe harbour rates for foreign mining companies
To promote the development of diamond cutting and polishing industry, which employs a large number of skilled workers, the budget has proposed safe harbor rates for foreign mining companies selling raw diamonds in the country.
Tax on distributed income of domestic company for buy-back of shares
It is also proposed that the sum paid by a domestic company for purchase/ buy-back of its own shares shall be treated as a dividend in the hands of shareholders, who received payment from such buy-back of shares and shall be charged to income-tax at applicable rates, without deduction for expenses. This has been done on the rationale that both dividend as well as buy-back are methods for the company to distribute accumulated reserves and thus ought to be treated similarly.
Withdrawal of Equalization levy
The 2024 Budget has withdrawn the Equalization levy of 2% as being too ambiguous. Such an equalization levy was imposed since 2016 on e-commerce business on the amount of consideration received/ receivable by an e-commerce operator from e-commerce supply or services targeted at Indian customers, where such e-commerce operator did not have a PE (permanent establishment) in India.
Comprehensive Review of the Indian Income Tax Act, 1961
Nirmala Sitharaman also announced a comprehensive review of the Income-tax Act, 1961 in the next 6 months with a view to make the Act concise, lucid, easy to read and understand, as well as to reduce disputes and litigation, thereby providing tax certainty to the taxpayers. A similar exercise was done a few years back by a committee appointed by the Finance Ministry, who submitted their report in 2019 along with a draft of new Income Tax Act, but Covid breakout changed the priorities of the government at that time.
Indirect Taxes
The finance minister’s budget proposals for customs duties intend to support domestic manufacturing, deepen local value addition, promote export competitiveness, and simplify taxation. The FM proposes to undertake a comprehensive review of the rate structure over the next six months to rationalize and simplify it for ease of trade, removal of duty inversion and reduction of disputes. The budget exempts 3 more cancer medicines from custom duties, reduces Basic Custom Duty (BCD) on Mobile phones and accessories to 15%, reduces custom duties on gold, silver and platinum, reduces BCD on certain marine products to 5 %, exempts more capital goods for manufacturing of solar cells and panels, as well as fully exempts custom duties on 25 critical minerals.
Focus of the Budget and Budget theme
As indicated in the interim budget announced before the Indian parliamentary elections, Sitharaman reiterated the need to focus on 4 major groups, namely ‘Garib’ (Poor), ‘Mahilayen’ (Women), ‘Yuva’ (Youth) and ‘Annadata’ (Farmer) with particular focus on employment, skilling, MSMEs, and the middle class
To take the country on the path of strong development and all-round prosperity, as stated in the interim budget, the Finance Minister has presented a detailed roadmap for pursuit of ‘Viksit Bharat’. In line with this strategy, this budget envisages sustained efforts on the following 9 priorities for generating ample opportunities for all.
These priorities are – 1) Productivity and resilience in Agriculture; 2) Employment & Skilling; 3) Inclusive Human Resource Development and Social Justice; 4) Manufacturing & Services; 5) Urban Development; 6) Energy Security; 7) Infrastructure; 8) Innovation, Research & Development; and 9) Next Generation Reforms.
