Budget And Your Personal Finances

When our Finance Minister Nirmala Sitharaman presented the budget, everybody had some expectations. While the common man expected more money in their pockets, different industries hoped that certain budget provisions would make their lives easier. 

There were some announcements for the common man, which may not be in line with what they expected, but it is important to know what they are and understand how they will affect our lives. Let us take a look. 

Batting For The New Tax Regime 

The Finance Minister has made two significant announcements for those opting for the new tax regime. “First, the government has made the new tax regime even more attractive by increasing the standard deduction from Rs 50,000 to Rs 75,000,” says Abhishek Soni, CEO, Tax2Win, an income tax portal. Second, she has tweaked the tax slabs a bit under the new tax regime, leading to tax savings of Rs 17,500. 

Table 1 

“Budget 2020 introduced the new tax regime. Under this new regime, the taxpayers have the option to pay concessional tax rates. However, major deductions and exemptions are not allowed under this new regime,” says Manikandan S, Tax Expert, ClearTax, a tax filing portal. This includes deductions under Section 80C, under 80D and also for house rent allowance (HRA). In budget 2023, the new tax regime was made the default tax regime.  

Does it make sense for you to opt for the old tax regime or the new tax regime? 

“If a taxpayer claims the maximum allowable deductions under Sections 80C and 80D, the tax payable will be the same under both regimes at an income level of Rs 7,75,000. For any income above Rs 7,75,000, the new regime is more beneficial; otherwise, the old regime is preferable," says Rahul Singh, Senior Manager, Taxmann, a tax and corporate advisor. 

Individuals choosing the old tax regime will not benefit from the changes in tax slabs and the standard deduction, as these apply only under the new tax regime under Section 115BAC. This is expected, as the government's primary goal is to encourage people to switch to the new tax regime.

“Due to significant changes in the slab rates, the new tax regime will always be beneficial for an employee who only claims Section 80C deduction. However, if there are other deductions, it is necessary to calculate taxes under both regimes to determine which is more advantageous,” adds Singh. 
 

Table 2 

Choosing between the old tax regime and the new tax regime

The table below displays the tax liability for a resident employee under both the old and new tax regimes, claiming deductions under Sections 80C and 80D, following the proposals made in the Finance (No. 2) Bill 2024.

Source: Taxmann

Property ‘indexation’ Puzzle Solved

Budget 2024 also removed the indexation for property sales and at the same time reduced long-term capital gains (LTCG) taxes on sale of property. 

“In an effort to simplify the tax process, the Finance Minister has eliminated the indexation clause for real estate assets and reduced the long-term capital gains (LTCG) tax rate from 20 per cent to 12.5 per cent,” says Samantak Das, Chief Economist and Head of Research and REIS - India, JLL, a real estate services company. 

“Investors with higher returns from their investments will likely benefit from the lower tax rate under the new rule, while those with lower returns will face higher tax liabilities,” says Sunil Dewali, Co-CEO of Andromeda Sales and Distribution, parent company of Andromeda Realty Advisors. 

Table 3 (Please see the Excel sheet for the final version of this table) 

Taxes On Sale Of Property: Decoded 

For example, suppose you bought a property in 2018-19 for Rs 50 lakh and sold it for Rs 1 crore in 2024-25.

Under the earlier tax rules, your capital gains and tax liability would be:

Indexed Cost of Acquisition = Rs 64,82,143 [Rs 50,00,000 x (CII 363 / CII 280)].

LTCG = Rs 35,17,857 (Rs 1,00,00,000 – Rs 64,82,143).

Tax Liability at 20 per cent = Rs 7,03,571.

Under the new tax rules, your capital gains and tax liability would be:

LTCG = Rs 50,00,000 (Rs 1,00,00,000 – Rs 50,00,000).

Tax Liability at 12.5 per cent = Rs 6,25,000.

In this case, the investor will benefit, paying Rs 78,571 less under the new tax rules.

However, if the returns are lower, suppose you bought a property in 2018-19 for Rs 50 lakh and sold it for Rs 80 lakh in 2024-25.
 

Under the earlier tax rules, your capital gains and tax liability would be:

Indexed Cost of Acquisition = Rs 64,82,143 [Rs 50,00,000 x (CII 363 / CII 280)].

LTCG = Rs 15,17,857 (Rs 80,00,000 – Rs 64,82,143).

Tax Liability at 20 per cent = Rs 3,03,571.

Under the new tax rules, your capital gains and tax liability would be:

LTCG = Rs 30,00,000 (Rs 80,00,000 – Rs 50,00,000).

Tax Liability at 12.5 per cent = Rs 3,75,000.

In this case, the investor will face a loss, paying Rs 71,429 more in tax.

Source: Andromeda Sales & Distribution; Note that these calculations do not include surcharges and cess, which will be added to the LTCG tax amount depending on the total taxable income.

Dewali says that in most cases, investors who have bought property in the last few years will benefit from the new tax rules, as property prices across the country have increased by over 10 per cent, and in some cases even above 20 per cent per annum in the last three to four years. However, in the long term, say 10, 15, or 20 years, most real estate prices have increased by around 10 per cent or less per annum. Therefore, very-long-term investors may end up paying higher taxes under the new rules.

Additionally, higher capital gains under the new rules will present another challenge for sellers, especially those looking to reinvest the LTCGs in residential property or capital gain bonds to claim tax exemptions. “This is because there are upper limits on how much LTCG can be reinvested in properties (a maximum of Rs 2 crore) and capital gains bonds, also known as 54EC bonds, which have a limit of only Rs50 lakh,” says Dewali.

All That Glitters 

The Finance Minister has made a big announcement regarding the reduction in gold and silver customs duty from 15 per cent to 6 per cent. “BCD (Basic Customs Duty) is reduced from 10 per cent to 5 per cent and AIDC (Agriculture Infrastructure and Development Cess) is reduced from 5 per cent to one per cent. Indian consumers would be able to buy now at a 9 per cent cheaper rate, so it will boost physical demand,” says Sachin Kothari, Director of Augmont - Gold For All, an app to buy, sell, or store gold or silver. 

MCX Gold prices have fallen by Rs 4,000 from Rs 7,3000 to Rs 69,000 as a knee-jerk reaction after this announcement and are expected to fall more up to around Rs 67,000/ 10 gm as per international pegged price. 

“It will create a level-playing field for honest industry stakeholders. Gold prices will also correct locally, thereby giving a boost to retail gold demand – another incentive to the Indian gold industry,” says Sachin Jain, Regional CEO – India, World Gold Council. 
 

However, while you can buy physical gold at lower prices, for the purpose of investment you should explore other options like investing in gold through gold exchange traded funds (ETFs). 

For investors who have yet to allocate to gold, this provides them with an opportunity to allocate at much lower gold prices due to the reduction in duties. Another important thing to note is that Gold ETFs will now attract 12.5 per cent LTCG for a holding period of 12 months. However, if you are investing in physical gold, the holding period for it to get the LTCG benefit is 24 months.

“This is a significant advantage from a tax perspective as compared to physical gold,” says Chirag Mehta, CIO, Quantum Asset Management Company.

To Sum Up 

For the common investor, the budget may not have many immediate implications but there is definitely a message. According to Vivek Banka, Co-founder of GoalTeller, a financial planning firm, in the budget we can see a clear push of the government to (a) reduce short-term trading and kill short-term investors, (b) promote the new tax regime and c) tax capital gains.
 

So, if you are investing for the long-term, there is not much you should do in view of the budget. Following the basic tenets of investing regularly in equity through mutual funds SIPs should not change. Also, as is evident, the Government is encouraging people to shift to the new tax regime. So, going ahead it would be wise to plan your investments based entirely on the time to your goals, your risk appetite and tax aspects, and not necessarily on whether you can save taxes under Section 80C.
 

“Equity continues to remain the best asset class in the medium to long term. Non-equity investments seem only as an asset allocation and would hardly beat inflation. Avoid thematic plays, though infrastructure pockets would continue to do well, pharma could be a dark horse and energy is a great theme for next five years for a small exposure. Real estate is best used for end use (tax benefits in the new regime would occur if your returns are in double-digits),” adds Banka. 

Now that the budget is over, life goes on. 

Anagh Pal

BW Reporters