The year 2024 marks a significant shift in India’s income tax laws, with changes aimed at streamlining the tax process, improving compliance, and offering tax benefits to various categories of taxpayers. These updates are crucial for individuals preparing to file their Income Tax Returns (ITRs) for the year 2025. The reforms, introduced after the general elections, are designed to ease the tax burden for taxpayers while promoting savings and investments in key sectors like retirement funds, equity, and housing. Here’s a comprehensive overview of the most significant updates in the tax laws and how they will impact taxpayers.
Revised Income Tax Slabs Under the New Tax Regime
One of the most notable changes in the 2024 tax reforms is the restructuring of the income tax slabs under the new tax regime. The goal of this revision is to make the tax system more equitable by reducing the burden on middle-income earners while maintaining the progressive nature of taxation.
Under the new regime, the first Rs 3,00,000 of income is completely exempt from tax, offering immediate relief to taxpayers. Income between Rs 3,00,001 and Rs 7,00,000 is taxed at 5%, which provides a lower tax burden on individuals with lower to moderate income. For earnings between Rs 7,00,001 and Rs 10,00,000, the tax rate is 10%, followed by a 15% tax rate on income between Rs 10,00,001 and Rs 12,00,000. The next bracket, covering income from Rs 12,00,001 to Rs 15,00,000, is taxed at 20%, and any income exceeding Rs 15,00,000 is taxed at the highest rate of 30%.
These changes result in potential tax savings of up to Rs 17,500 annually for taxpayers opting for the new regime, which is especially beneficial for individuals in the Rs 5,00,000 to Rs 10,00,000 income range. This restructuring also aligns with the government’s goal of simplifying the tax process, reducing tax evasion, and encouraging tax compliance.
Increase in Standard Deduction and Deductions for Family Pensioners
For those opting for the new tax regime, there is an increase in the standard deduction limit, rising to Rs 75,000 from the previous Rs 50,000. This increase benefits salaried individuals and pensioners, effectively lowering their taxable income and providing relief from rising living costs. Additionally, the deduction for family pensioners has been hiked to Rs 25,000 from Rs 15,000, further alleviating their tax burden.
On the other hand, the old tax regime retains the previous deduction limits of Rs 50,000 for salaried individuals and Rs 15,000 for family pensioners. This makes the new regime more attractive for individuals who have a moderate to high income and are looking for more deductions, allowing them to reduce their taxable income even further.
Enhanced National Pension System (NPS) Deductions for Employers’ Contributions
In an effort to boost retirement savings, the new tax regime allows for enhanced deductions on employer contributions to the National Pension System (NPS). Employees can now claim deductions up to 14% of their basic salary for NPS contributions made by their employers, an increase from the previous 10%.
This increase in the NPS deduction is a positive step for individuals looking to secure their financial future while benefiting from tax deductions. It also encourages participation in NPS, a long-term retirement savings scheme that offers tax benefits and a safe avenue for building wealth. However, there is a cap on total contributions, with any amount exceeding Rs 7.5 lakh across Employee Provident Fund (EPF), NPS, and superannuation funds being taxable.
Simplified Capital Gains Taxation and Exemptions
The government has simplified the taxation of capital gains, which directly impacts investors and those involved in property transactions. Short-term capital gains (STCG) on equity and equity-oriented funds are now taxed at 20%, up from the previous 15%. This simplification of capital gains tax rates aims to make tax calculations easier for investors.
Additionally, long-term capital gains (LTCG) on all assets, including equities, are now taxed uniformly at 12.5%. Although the tax burden on short-term capital gains has increased, the new structure applies a consistent rate for long-term gains, making it easier for taxpayers to calculate and plan their tax liabilities.
There is still an annual exemption of up to Rs 1.25 lakh on LTCG from equity and equity-oriented funds, which helps mitigate the tax burden for retail investors. However, the removal of indexation benefits for certain assets will impact long-term investors by making their gains subject to tax without adjusting for inflation.
Rationalization of TDS Rates
The government has rationalized the Tax Deducted at Source (TDS) rates across various payment categories to reduce the upfront tax burden on taxpayers. For example, the TDS rate on insurance commissions has been reduced to 2%, while rent payments will now attract a 2% TDS, and e-commerce payments will be taxed at a mere 0.1%.
This rationalization makes tax compliance easier for taxpayers by reducing the amount of tax deducted at source, allowing individuals to retain more money throughout the year and potentially reduce their tax liabilities when filing returns.
Adjusting TDS and TCS Against Salary Income
A major improvement for salaried individuals is the ability to adjust TDS or Tax Collected at Source (TCS) deductions from other income sources against the TDS deducted from salary. This provides relief for taxpayers, especially those with multiple sources of income. It helps in smoothing out cash flow concerns, allowing individuals to retain more money in their monthly salary.
Changes in TDS on Property Sales
In property transactions involving a sale value of over Rs 50 lakh, TDS is now applicable on the entire sale value, regardless of the shares held by individual sellers. This change aims to strengthen tax compliance and prevent evasion, especially in the real estate sector, which has traditionally been a source of tax-related issues. By making TDS applicable to the entire sale value, the government ensures that proper tax is paid upfront, reducing the risk of underreporting income.
Vivad Se Vishwas Scheme 2.0 Reintroduced
To provide relief to taxpayers with ongoing tax disputes, the government has reintroduced the Vivad Se Vishwas Scheme 2.0. This scheme offers taxpayers a way to resolve their tax cases through a more efficient process, reducing the amount of time and effort spent in litigation. By offering the opportunity to settle pending disputes quickly, this scheme will benefit both the government and taxpayers by clearing up longstanding issues and avoiding lengthy court proceedings.
Aadhaar Now Mandatory for ITR and PAN Applications
Starting October 2024, the government will require Aadhaar to be used for filing Income Tax Returns (ITRs) and for applying for a PAN card. This change is intended to reduce the risk of tax fraud and improve the security of the tax system. Taxpayers who do not have Aadhaar will face difficulties in completing these processes, making it essential for individuals to link their Aadhaar numbers with their PAN cards before the deadline.
Reduced Time Limit for Revising Old ITRs
To expedite the tax process and reduce litigation, the time limit for reopening old Income Tax Returns (ITRs) has been reduced to five years for cases involving income escaping assessments over Rs 50 lakh. This move aims to minimize prolonged litigation, providing greater certainty to taxpayers and encouraging quicker resolutions. The reduced time limit for revisions reflects the government’s goal of streamlining the tax filing process and providing a clearer path to resolution.
