Taxpayers have good reason to feel deeply disappointed over the absence of major tax breaks in the budget that marks the start of Modi 3.0.

Salaried individuals have been granted a modest increase in standard deduction from ₹50,000 to ₹75,000, which is restricted to those who file their returns under the new tax regime that offers virtually no exemptions.

The income tax slabs have been slightly tweaked. Individuals with incomes up to ₹3 lakh a year will not have to pay any tax as before.

The next three slabs have been slightly widened: the old ₹3-6 lakh slab has now been stretched to ₹3-7 lakh and will attract a 5 per cent levy. The next slab of ₹7-10 lakh will be taxed at 10 per cent.

A new tax slab of ₹10-12 lakh will be taxed at 15 per cent.

These changes are designed to make the new tax regime more attractive to taxpayers. “As a result of these changes, a salaried employee in the new tax regime stands to save up to ₹17,500 in income tax,” the finance minister said.

But how was this number arrived at?

The tax burden on an income of ₹15 lakh under the earlier new regime was ₹150,000 and it will stand reduced to ₹140,000 with the proposed changes. The standard deduction in case of salaried taxpayers filing returns under the new tax regime has been increased by ₹25,000 which will allow a maximum tax reduction of ₹7,500 if a taxpayer has to pay tax at the rate of 30 per cent. These two combined take the figure to ₹17,500.

Taxpayers who have opted for the old tax regime to take the benefit of exemptions were also hoping for an increase in the standard deduction. But unfortunately, they have been denied this benefit.

Finance minister Nirmala Sitharaman also proposed an increase in the deduction on family pension from Rs 15,000 to Rs 25,000 for taxpayers under the new tax regime.

Capital gains tax

Investors were stunned by the government’s decision to raise the capital gains tax on equity investments — which will crimp the gains that they have made as a bullish wave swept through the markets.

There will only be two holding periods — 12 months and 24 months — to determine whether the investor needs to pay a short-term or a long-term capital gains tax.

For all listed securities, the holding period will be 12 months and, for all other assets, it will be 24 months.

Short-term gains on specified financial assets shall henceforth attract a tax rate of 20 per cent instead of 15 per cent. The long-term capital gains tax will now rise to 12.5 per cent.

Thus, units of listed business trusts will now rank on a par with listed equity shares at 12 months instead of the earlier 36 months. The holding period for bonds, debentures and gold will be reduced from 36 months to 24 months. In the case of unlisted shares and immovable property, it shall remain at 24 months.

The rate for short-term capital gains under the provisions of Section 111A of the Act on STT-paid equity shares, units of equity-oriented mutual fund and units of a business trust are proposed to be increased to 20 per cent from the present rate of 15 per cent. Other short-term capital gains shall continue to be taxed at the applicable rate.

The rate of long-term capital gains under various sections is proposed to be 12.5 per cent in respect of all categories of assets. This rate earlier was 10 per cent for STT-paid listed equity shares, units of the equity-oriented fund and business trust under section 112A and for other assets it was 20 per cent 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 fund and business trust, thus, increasing the previously available exemption which was 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 per cent without indexation.

For listed bonds and debentures, the rate shall be reduced to 12.5 per cent. Unlisted debentures and unlisted bonds are of the nature of debt instruments and, therefore, any capital gains on them will be taxed at the applicable rate, whether short-term or long-term.

This amendment to Section 50AA shall come into effect from July 23 (Tuesday).

Simultaneously with the rationalisation of the rate to 12.5 per cent, the indexation available under the second proviso to Section 48 has been proposed to be removed for the calculation of any long-term capital gain which is presently available for property, gold and other unlisted assets. These proposals will also come into effect immediately.

Simplification

The finance minister has also proposed to simplify the provisions for reopening and reassessment.

The time limit for search cases has been reduced from 10 years to 6 years. These are welcome moves as it is difficult to keep records for such long-time periods. The aim is to reduce tax uncertainty and prolonged disputes.

Narayan Jain is a tax advocate. The views expressed are personal