2024 Full budget seems like yesterday still, and we already have the 2025 Budget. And keeping with the past trend, we have our analysis ready for you. 

As most of you might already know by now (if not, then you know now!), that the most noteworthy topic of this budget was changes in the Personal Income taxes, as compared to large scale structural kind of reforms - in quite a contrast to previous years (and saved us from writing the same comment from the past few years! 🙂 ). Though there are quite a few important reforms too - which we will try to cover, but yes, this time, we shall focus more, with examples, on the tax changes, to try to answer as many questions as possible!

Key Highlights:

Rural, Agriculture & MSMEs:

1. India Post along with the India Post Payment Bank, will be repositioned to act as a catalyst for the rural economy. Its service offerings will be expanded to cover DBT, EMI pickups, assisted digital services etc. It will also be transformed as a large public logistics organization.

2. On the agriculture front - initiatives like special 6 year missions for Toor, Urad and Masoor dal, self reliance in edible oils - have been announced. 

3. Customized Credit Cards will be introduced for Micro Enterprises with an INR 5 lakh limit for the enterprises registered on Udyam portal. In the first year, 10 lakh such cards will be issued.

4. A new scheme will be launched for 5 lakh women, Scheduled Castes and Scheduled Tribes first-time entrepreneurs. This will provide term loans up to INR 2 crore during the next 5 years.

5. 15 crore households representing 80% of India's rural population are connected with tap water under the Jal Jeevan Mission. This mission is now extended until 2028 to achieve 100% coverage with enhanced outlay.

Innovation, Deep Tech, Digital Public Infra:

6. Commitments received by AIFs (Alternative Investment Funds) exceeding INR 91,000 crore are supported by the Fund Of Funds set up with a Government contribution of INR 10,000 crore. Now, a new Fund of Funds, with expanded scope and a fresh contribution of another INR 10,000 crore will be set up.

7. Allocation of INR 20,000 crore is committed towards the Research, Development and Innovation initiative announced in the previous budget. A Deep Tech Fund of Funds will also be explored to catalyze the next generation startups as a part of this initiative.

8. National Geospatial Mission to develop foundational geospatial infrastructure and data. Using PM Gati Shakti, this Mission will facilitate modernization of land records, urban planning, and design of infrastructure projects.

9. A digital public infrastructure, ‘BharatTradeNet’ (BTN) for international trade will be set-up as a unified platform for trade documentation and financing solutions. This will complement the Unified Logistics Interface Platform.

10. A Nuclear Energy Mission for R&D in Small Modular Reactors (SMR) with an allocation of INR 20,000 crore will be set up, with an aim to indigenously develop at least 5 SMRs by 2033. This will help achieve developing at least 100 GW of nuclear energy by 2047 is essential for our energy transition efforts.

11. The Clean Tech manufacturing mission will aim to improve domestic value addition and build our ecosystem for solar PV cells, EV batteries, Motors and controllers, electrolyzers, wind turbines, very high voltage transmission equipment and grid scale batteries.

12. To implement the earlier announcement on simplifying the KYC process, the revamped Central KYC Registry will be rolled out in 2025. A streamlined system for periodic updating will also be in place.

13. 50,000 Atal Tinkering Labs will be set up in Government schools in next 5 years to cultivate the spirit of curiosity and innovation, and foster a scientific temper among young minds.

14. Additional infrastructure to support 6,500 more students will be created in the 5 IITs started after 2014.

15. Government will arrange for their identity cards and registration of the nearly 1 crore gig workers of the online platforms (we know many of those!) on the e-Shram portal. They will be provided healthcare under PM Jan Arogya Yojana.

Other important measures:

16. Tourism - Top 50 tourist destination sites in the country will be developed in partnership with states through a challenge mode. Land for building key infrastructure will have to be provided by states. MUDRA loans will be provided for home stays. Efforts to be undertaken to improve ease of travel and connectivity to tourist destinations.

17. FDI limit for the insurance sector to be raised from 74% to 100%. This limit will be available for those companies which invest the entire premium in India.

18. An initiative to update certain regulations that were made under old laws is also announced. To develop this modern, flexible, people-friendly, and trust-based regulatory framework appropriate for the 21st  century, a High-Level Committee for Regulatory Reforms will be set up for a review of all non-financial sector regulations, certifications, licenses, and permissions. The committee will be expected to make recommendations within a year. The objective is to strengthen trust-based economic governance and take transformational measures to enhance ‘ease of doing business’, especially in matters of inspections and compliances.

Economic performance

1. The Fiscal deficit (revised) is estimated at 4.8% of GDP (against 4.9 projected during 2024 full budget).

2. For FY 2025-26 the fiscal deficit is estimated to be 4.4 per cent of GDP (against initial target of 4.5 provided in 2024 full budget).

Tax changes:

1. Several indirect tax changes - including relief on import of Drugs/Medicines by fully exempting custom duties or reducing to concessional rates for several critical medicines and drugs, including for manufacture of such medicines and changes in duties with respect to textiles, Flat Panel Displays, Lithium Ion batteries etc.

2. New income tax bill to be introduced next week, which will replace the existing Income Tax Act, 1961. This could be a major shift, including simplification of laws and procedures. The actual provisions of the bill remain to be seen formally. Notice the fact that it will be a “Bill”. Which means, once passed, it is expected to become a Law, once the President gives the assent. 

3. The TDS limit for interest for senior citizens is being doubled from the present INR 50,000 to INR 1 lakh. Similarly, the annual limit of INR 2.40 lakh for TDS on rent is being increased to INR 6 lakh. This will reduce the number of transactions liable to TDS, thus benefiting small taxpayers receiving small payments.

4. Both TDS and TCS are being applied on any transaction relating to sale of goods. To prevent such compliance difficulties, TCS will be omitted.

5. The time-limit to file updated returns for any assessment year, is extended from the current limit of two years, to four years. This can facilitate voluntarily reporting any incomes or credits, which might have been missed by the taxpayers earlier, without any legal troubles. 

6. Currently, taxpayers can claim the annual value of a second self-occupied property as nil only on the fulfilment of certain conditions. Considering the difficulties faced by them, it is proposed to allow the benefit unconditionally.

7. Clarificatory - gains from the redemption of unit linked insurance policies to which exemption under section 10(10D) does not apply, shall be treated as capital gains.

8. NPS Voluntary contributions deduction available under section 80CCD (1B) is extended to the NPS Vatsalya accounts. It is worth noting, that as per the details available at this point, this will be included within the limit of INR 50,000 currently available. Further, since this is extended in the existing section, it also means that this deduction will not be available under the New Tax regime.

9. Increase in the limits on the income of the employees for the purpose of calculating perquisites: The provisions of Section 17 are proposed to be amended so that the power to prescribe rules may be obtained to increase these limits. Detailed reading of this announcement reveals to quite important changes, which may help quite a few employees:

1. Any benefit exceeding INR 50,000 in value, provided to employees was treated as a taxable perquisite. Going forward, this amount shall be prescribed from time to time.

2. Any cost related to travel by an employee or their family member with respect to the medical treatment of an employee, was treated a taxable perquisite, if the taxable income of the employee exceeded INR 2 lakhs. This value too, shall now be prescribed from time to time.

10. The much talked about (and much awaited) ones - Tax slab changes and rebate examples for income up to 12 lakhs - covered after our conclusion.

Conclusion (Our view):

Listening through the speech and going through a bit of fineprint post the speech, few things are clearly coming out - 

1. Government is looking to adopt a more trust based, light touch kind of approach with respect to finance aspects as well as non finance aspects impacting finance. There were quite a few such parts in the speech, which we haven't been able to cover in this analysis. 

2. Capex, agri reforms, MSMEs and Strategic divestment continues to be a priority still, it is just that not many details have been covered in the speech, but can be seen in the fineprint (provided in footnotes) - 11.2 lakh crore of Capex - may sound like flattish as compared to past budgets, but the amount is quite huge in itself. 

3. Fiscal discipline continues to be a prime focus as well, which can be seen from the consistent beat on own targets and estimates year on year. 

4. While doing all this, they have still managed to honor the long standing demand of Individual taxpayers, by doing a paradigm shift kind of changes in tax structure - leaving genuinely more money in the hands of taxpayers - overall it is approx INR 1.02 lakh crore, spanning across Direct taxes (1 lakh crore) and Indirect taxes (2 thousand crore) which are still within the remit of Central Government after GST. 

Credit where due - despite the fact that the personal tax changes were long overdue - the honorable Finance Minister did it this time, while still ensuring no or minimal compromises on the other key focus areas. Yes, in terms of misses, there will always be aspects that one may feel, could have been covered, but everything may not always be possible! 

Let us now move on to the examples in detail. 

Examples:

Before we cover the slabs, we would like to cover the statement that is creating a lot of buzz - the statement which says that there will be no tax for people earning up to INR 12 Lakhs (or, in case of salaried taxpayers, including Standard deduction - INR 12.75 Lakhs). Many of you might be confused, that if there is no tax till INR 12 Lakhs, then why are there slabs starting from INR 4 Lakhs? This is explained here:

As we see here - there is a rebate of INR 60,000 available, which makes the tax liability 0. Clearly, this is not the same as “Basic exemption limit” being INR 12 Lakhs!

One may ask, what if the Income ends up being, say, 12.1 Lakhs - where computed tax liability will be INR 61,500? There looks to be a clear disadvantage for earning that additional 10,000?

Answer is - No. This is where Marginal relief comes into the picture. This effectively means that this Tax liability of INR 61,500 will be compared with INR 10,000 - additional amount over INR 12 Lakhs. And the lower of the 2 will be taken as tax liability.

Accordingly in this case, 10,000 < 61500, hence Tax liability will be INR 10,000 + cesses. In terms of calculation, this may appear different, however, this illustration is for simplifying the provisions.

Though, it is important to note, that this benefit will still not apply on incomes taxable at Special rates. Meaning - if in the above example, the net INR 12 Lakhs included INR 1 lakh of Short Term Capital Gain (STCG), taxable at 20%, then there will be no tax on INR 11 Lakhs, but the STCG of INR 1 Lakh will be taxed at the special rate of 20%.

Let us now look at the Slab changes.

Comparative slabs:

And this time, these are seriously big ones. The break even point of “Deductions foregone” vs “Benefits in the New Tax Regime” goes even higher. Below example shows how someone availing Deductions plus Tax Free Incomes of up to INR 5.66 lakhs too, who would have earlier had some advantage in the Old regime, could now be inclined to move to the New Tax Regime - due to the lower taxes, plus of course, the “no hassle” filing!

And of course, when comparing New regime vs New regime, it is an even bigger advantage.

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Footnotes:

1. Link to Budget Speech, Finance bill, Memorandum
   

2. Key Budget Highlights / Stats.

Another budget and another similar pattern - very few things on taxation, especially the Old income tax regime, but expanding even more on infra - physical as well as digital - with another steep rise in Govt Capex. There are a few changes on the New tax regime front too, which we will try to cover in the later part of this article, with an example too.

Key Highlights:

Once again, these measures are aimed to build upon the foundation laid out in the previous budget, as we move towards India@100.

• 4 key opportunities have been identified, as focus areas in this journey - Economic empowerment of women, PM VIKAS (development of artisans to suit current needs), Tourism, Green growth.

• 7 priorities of the budget - Inclusive Development, Reaching the Last Mile, Infrastructure and Investment, Unleashing the Potential, Green Growth, Youth Power, Financial Sector.

Physical Infra, renewable focus:

• An Urban Infrastructure Development Fund (UIDF) will be established to create urban infrastructure in Tier 2 and Tier 3 cities.

• On urban sanitation - All cities and towns will be enabled for 100% mechanical desludging of septic tanks and sewers to transition from manhole to machine-hole mode.

• 13 GW renewable energy capacity in Ladakh will be integrated on grid for inter state transmission, with a central govt expenditure of INR 8,300 crore.

• A Green Credit Programme will be notified under the Environment (Protection) Act, to incentivize environmentally sustainable and responsive actions.

Digital Infra:

• An open source, open standard, interoperable digital public infrastructure for agriculture will be built. This, combined with an Agriculture Accelerator Fund to be set up, will help bring in technology to improve farming practices and help farmers increase productivity and profitability.

• A computerization of Primary Agricultural Credit Societies is initiated with an aim to build a national co-operative database. Aim is to decentralize the storage capacity, to improve storage of farm produce and help farmers get a better pricing for their produce.

• Setting up of a National Digital Library, with device agnostic accessibility.

• A tourist experience App to be launched, covering various aspects like tourist safety, physical connectivity, local guides etc. about the destination. Atleast 50 such destinations to be identified initially.

• National Data Governance Policy is announced to allow anonymized access to data.

• A simplified, risk based KYC process to be adopted. Financial sector regulators to also review the KYC process to align with the Digital India initiative.

• Digilocker service and Aadhar to be relied on as a core source to have a single place for citizens for updating their identity and address. Scope of documents stored in Digilocker will be expanded to enable Fintech innovative services.

• A national financial information registry will be set up to serve as the central repository of financial and ancillary information. A new legislative framework will govern this credit public infrastructure, and it will be designed in consultation with the RBI.

• PAN will be used as the common identifier for businesses, for all digital systems of specified government agencies. This will be done as a legal mandate, to improve ease of doing business.

• A Unified Filing Process will be introduced for filing forms and returns with various government agencies, at a single place.

Economic performance:

• Capital expenditure was announced to the extent of a staggering 10 lakh crores - which is almost 3x the expenditure announced in FY 2019-20, and a 33% increase over previous budget.

• Capital expenditure on Railways is 2.4 lakh crores.

• Fiscal deficit for FY 2022-23 stands at 6.4% of GDP and is estimated to be at 5.9% of GDP for FY 2023-24. In line with the previous budget announcement, we are on track to achieve the Fiscal deficit target of 4.5% of GDP, by FY 2025-26.

Tax changes:

• Number of basic customs duty rates on goods, other than textiles and agriculture, reduced from 21 to 13, for a simplified tax structure.

• National Calamity Contingent Duty (NCCD) on specified cigarettes to be increased by ~ 16%.

• Surcharge on income exceeding INR 5 Crore is now reduced for 37% to 25%. This will bring down the maximum tax rate from 42% to 39%. Though this change applies only in the New tax regime.
  

• Tax free leave encashment limit for non government, salaried employees increased from INR 3 lakhs to INR 25 lakhs.

• New tax regime to be the default tax regime. To clarify, this is not mandatory. Individual & HUF Assessees who do not wish to be taxed under this regime, can opt for the old regime.

• Deductions under sections 54 to 54F, for long term capital gains, to be limited to INR 10 crore.

• Thresholds for opting for presumptive taxation increased from INR 2 Crore to INR 3 crore for businesses and INR 50 lakhs to INR 75 lakhs for specified professions.

• Insurance payouts (other than in case of death), for insurance policies (Other than ULIPs) where aggregate premium paid on the policy exceeds INR 5,00,000, shall be taxed. It will not be treated as an exempt income under section 10 (10D) anymore.

Details of changes under New tax regime:

A relief in tax will be available to assessees with total income up to INR 7 lakhs (up from INR 5 lakhs earlier). This means that any tax payable on total income up to this limit, will be provided as a rebate and the assessee will not have to pay any tax. And on a side note - this means that an Income Tax Return still needs to be filed.

Further, this increased limit is applicable only under the new tax regime. It continues to be INR 5 lakhs, under the old tax regime.

Standard deduction from Salary income of INR 50,000 will be allowed under the new tax regime as well.

All other deductions continue to be disallowed. Please refer to our 2020 Budget analysis here for details.

Revised slabs under new regime only:

To put this in perspective with Old regime slabs and existing new regime slabs, we have the below comparison:

As soon as we include deductions up to INR 3,75,000 in any form in the above table, the new proposed slabs in the new regime becomes neutral. Any more deductions than this, would mean that even the new slabs in the new tax regime are not beneficial to the assessee. These aspects need to be factored in when making the selections for FY 2023-24.

Conclusion (Our view):

Probably the measures on the personal income tax front may appear to be bit of a disappointment and one would expect them to make the New income tax regime more attractive. This could take some time as the regime is quite new and we are confident that we will see changes based on industry feedback.

However, like all previous budgets, the government is continuing its push towards more and more infra development, along with an attempt to improve the ease of compliance through various measures.

It is a growth oriented budget, with a clear path laid out to move towards the goal of becoming a developed country, while at the same time, continuing on a path of fiscal consolidation to strengthen the economy.

Footnotes:

1. Links to Budget Speech, Budget memo, Finance bill.

2. For any queries/feedback/suggestions, feel free to reach out to us at help@ayanshfinsights.com, or drop us a message/chat/call on our number: +91 93220 27741.

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