Key Tax Reforms from the 2024 Union Budget: Major Changes Effective October 1, 2024

The Union Budget 2024, presented by Finance Minister Nirmala Sitharaman, introduced several major reforms in India’s tax system aimed at streamlining processes and addressing longstanding challenges. Many of these reforms will take effect on October 1, 2024, and will impact both individuals and businesses.

1. Direct Tax Vivad Se Vishwas Scheme (VSV) 2.0

Building on the success of the original VSV Scheme in 2020, the government is launching VSV 2.0, which will become effective from October 1, 2024. This new version allows taxpayers to settle disputes related to tax, interest, penalties, or fees that are pending as of July 22, 2024, across various appellate authorities, including the High Courts and Supreme Court.

Under the revised scheme, if the tax department has filed the appeal, taxpayers can resolve disputes at a significantly reduced settlement amount, with a 50% reduction. This provision is expected to provide quicker and more favorable outcomes for taxpayers while also helping to clear the backlog of tax cases.

2. Taxation on Share Buybacks

Companies have historically used the buyback method to avoid double taxation. Previously, while companies paid taxes on the buyback, shareholders were exempt from taxation on the proceeds. However, starting October 1, 2024, shareholders will be taxed on buyback proceeds according to their respective tax brackets, aligning buyback tax treatment with that of dividends.

In addition, companies will now be required to deduct TDS at a rate of 10% for resident shareholders and 20% for non-residents. Shareholders can no longer offset the purchase cost against buyback proceeds, although they may treat the purchase cost as a capital loss to be adjusted against other capital gains.

3. Revised TDS Rates

Effective October 1, 2024, several TDS rates will be lowered to reduce the tax burden on various transactions:

  • Section 194DA: TDS on life insurance policy payments reduced from 5% to 2%.
  • Section 194G: TDS on lottery ticket sales commission cut from 5% to 2%.
  • Section 194H: TDS on commission or brokerage payments reduced from 5% to 2%.
  • Section 194-IB: TDS on rent paid by certain individuals or HUFs lowered from 5% to 2%.
  • Section 194M: TDS on specific payments made by individuals or HUFs reduced from 5% to 2%.
  • Section 194-O: TDS on payments by e-commerce operators reduced from 1% to 0.1%.
  • Section 194F: TDS on mutual fund repurchases has been removed.

4. Penalties Under the Black Money Act (BMA)

The government has provided some relief under the Black Money Act (BMA). Penalties under Sections 42 and 43 will no longer apply if the undisclosed assets are valued at Rs. 20 lakh or less. This change encourages voluntary disclosure of smaller assets without the heavy penalty burden.

5. Increase in Securities Transaction Tax (STT)

In light of the growth in the derivatives market and rising trading volumes, Securities Transaction Tax (STT) rates will increase from October 1, 2024:

  • Futures: STT will increase from 0.0125% to 0.02%.
  • Options: STT will rise from 0.0625% to 0.1% of the premium.

Additionally, STT on share buyback proceeds will now be taxed according to the individual’s income tax bracket.

6. Changes to Aadhaar Card Provisions

Starting October 1, 2024, taxpayers will no longer be able to use the Aadhaar Enrolment ID in place of an Aadhaar number for PAN applications or income tax return filings. It is recommended that taxpayers link their Aadhaar with their PAN to ensure smooth filing.

7. Floating TDS Rate on Government Bonds

From October 1, 2024, a 10% TDS will apply to interest income from central and state government bonds, including Floating Rate Savings Bonds. However, no TDS will be deducted if the total interest income is less than Rs. 10,000 in a financial year.

8. Withdrawal of 20% TDS on Mutual Fund Repurchases

Investors will receive significant tax relief as the 20% TDS on mutual fund repurchases will be withdrawn. This change is expected to boost investment in mutual funds and result in substantial tax savings for investors.

Read More: Vivad Se Vishwas 2.0: Reduced Settlement for Declarations Filed by December 31

9. Clarification on TDS for Sale of Immovable Property

Section 194-IA now clarifies that the 1% TDS on payments for the sale of immovable property valued over Rs. 50 lakh will apply collectively in transactions involving multiple buyers or sellers. This clarification simplifies the tax liability for real estate transactions.

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