Major Income Tax Reforms in 2024 That Will Impact Your ITR Filing in 2025
In 2024, income tax changes were implemented mid-year. This occurred because the Union Budget 2024 was presented in July, following the General elections held from April to June 2024. As the budget was issued halfway through the year, many taxpayers might have overlooked the income tax law changes introduced in July 2024. Most of these changes are effective from the financial year 2024-25 and will affect the tax deductions and exemptions available when filing income tax returns (ITR) in July 2025.
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1. Standard deduction limit hiked?
The government has also increased the standard deduction limit under the new tax regime for FY 2024-25, providing additional relief to taxpayers.
If you choose the new tax regime, you can now claim a standard deduction of ?75,000, up from the earlier ?50,000. Similarly, for family pensioners, the standard deduction has been raised to ?25,000, compared to ?15,000 earlier.
However, there’s no change in the standard deduction limit for those sticking to the old tax regime for FY 2024-25 (AY 2025-26). Under the old regime, salaried individuals and pensioners can still claim a deduction of ?50,000, while family pensioners can claim ?15,000.
Impact: The increase in the standard deduction limit under the new tax regime offers significant relief to salaried individuals and pensioners. It allows them to claim a higher deduction, reducing their overall tax burden if they opt for the new regime.
If you’re earning a salary, pension, or family pension, you can take advantage of this standard deduction from your gross income before your taxes are calculated, making it easier to save on taxes.
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2. New tax rates for LTCG and STCG?
The government has introduced revised rules for capital gains taxation starting from FY 2024-25, aimed at simplifying the regime. Here's what’s new:
i) Short-term capital gains (STCG) on equity and equity-oriented mutual funds will now be taxed at 20%, up from 15%.
ii) STCG from other assets, like property, gold, or other financial and non-financial assets, will be taxed according to the applicable income tax slabs.
iii) Long-term capital gains (LTCG) from all assets will now be taxed uniformly at 12.5%, replacing the varied rates applied earlier.
iv) LTCG on equity and equity-oriented mutual funds will remain tax-free for amounts up to ?1.25 lakh annually, up from the previous limit of ?1 lakh.
v) The indexation benefit for LTCG from the sale of the house property has been partially withdrawn. For houses purchased on or before July 22, 2024, taxpayers can choose between two options:
This choice of taxation method is available only to resident individuals and Hindu Undivided Families (HUFs). Non-residents and other taxpayers must pay 12.5% tax without indexation.
Impact: These changes make calculating taxes on capital gains more straightforward, as the earlier rules differed significantly across asset types. However, taxpayers should note that the new regime will apply only to assets sold on or after July 23, 2024. For sales made on or before July 22, 2024, the old rules remain in effect.
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3. New income tax slabs changed under the new tax regime
The government has revised the income tax slabs under the new tax regime, bringing significant benefits to taxpayers. These changes aim to help individuals and other taxpayers save more on income tax for FY 2024-25.
Impact: The revised income tax slabs under the new tax regime enable taxpayers to save up to ?17,500 annually. The updated income tax slabs for FY 2024-25 are as follows:
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4. Claiming TDS/TCS tax credit to lower TDS on salary?
Salaried employees can now claim credit for tax deducted on other incomes (besides salary) and tax collected at source (TCS) on other expenses against the TDS on their salary income.
Impact: This change allows salaried individuals to reduce the tax deducted from their salaries by accounting for TDS and TCS credits from other sources. It helps prevent cash flow issues, ensuring individuals have more money available in their bank accounts.
5. TCS on buying notified luxury goods?
Individuals purchasing notified luxury goods will face an additional cost due to the introduction of TCS (Tax Collected at Source) on such items. The TCS will apply to the value of luxury goods exceeding ?10 lakh.
Impact: This new rule will take effect from January 1, 2025. However, the government has not yet released the official list of luxury goods or details on how the TCS will be implemented. Buyers should stay informed about these developments to understand the financial implications.
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6. Tax on buyback of shares?
The government has revised the income tax rules regarding the taxation of proceeds from share buybacks by companies. Under the new rules, the sale proceeds received from a share buyback will now be taxed directly in the hands of the individual shareholders. This is similar to how dividends are taxed, based on the applicable income tax slab rates of the individual.
Impact: Effective from October 1, 2024, this change is expected to increase the tax liability for individuals in the 30% tax slab. However, individuals in lower tax slabs (below 20%) stand to benefit, as they will pay less tax on buyback proceeds compared to the earlier system.
Until September 30, 2024, companies buying back shares were required to pay a Dividend Distribution Tax (DDT) at 20%, plus a 12% surcharge and 4% cess, on the buyback amount. This amendment shifts the tax burden from companies to individual shareholders, potentially creating varied tax outcomes based on personal income levels.
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7. Changes in holding period for capital gains taxation?
The government has revised the holding periods required to classify capital gains as either short-term or long-term. Under the new rules:
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Impact: These changes simplify the process for taxpayers, making it easier to remember the required holding periods for different assets. This clarity helps individuals plan their investments better to qualify for long-term capital gains taxation.
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8. Higher deduction on employer's contribution to NPS?
If you choose the new tax regime for FY 2024-25, you can now claim a higher deduction for your employer's contribution to the National Pension System (NPS). The limit has been increased to 14% of your basic salary, compared to the previous cap of 10%.
This deduction, available under Section 80CCD(2) of the Income Tax Act, 1961, is applied to your gross income to determine your taxable income. In the new tax regime, apart from the standard deduction, this is the only deduction you can claim.
For those opting for the old tax regime, the Section 80CCD(2) deduction remains unchanged and can still be claimed in addition to the ?1.5 lakh deduction under Section 80C and ?50,000 for NPS investments under Section 80CCD(1b).
Impact: The increased deduction in the new tax regime means you can save more on taxes compared to earlier. However, keep in mind that if your employer's total contributions to EPF, NPS, and the Superannuation Fund exceed ?7.5 lakh in a financial year, the excess amount will be taxable. Additionally, any interest or returns earned on the excess contribution will also be taxed.
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9. TDS on RBI floating rate bonds?
The government has added RBI floating rate bonds to the list of financial instruments subject to TDS (Tax Deducted at Source). TDS will be deducted if the interest received on these bonds exceeds ?10,000 per month.
Impact: This new rule, effective from October 1, 2024, will reduce the amount received by investors, as tax will be deducted before the final payment is made to them.
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10. Rationalisation of TDS rates?
The government has streamlined the TDS (Tax Deducted at Source) rates for certain types of incomes, simplifying the process. However, this rationalisation applies only to specific incomes.
TDS rates remain unchanged for:
Rationalised TDS rates include:
Impact: This rationalisation allows taxpayers impacted by these changes to keep more of their earnings, as less tax will be deducted from payments made to them.
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11. Allowing TCS credit to other person
To ease the cash crunch of the middle class, the government has allowed persons other than the collectee (from whom tax is collected (TCS)) to claim credit of the TCS in place of the collectee.?
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Impact: The government has already notified the mechanism by which the TCS tax credit can be claimed by a person other than the collectee. The new provision will help parents who pay money for children's tuition fees in foreign universities but are unable to claim TCS credit on their behalf. However, note that the new rule will come into effect from January 1, 2025.?
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12. Amendment in TDS on sale of house property?
The law regarding TDS on property sales has been updated to ensure that tax is deducted by the buyer before making the payment to the seller. Under the new amendment, TDS must be deducted from the total payment if it exceeds ?50 lakh, regardless of whether each seller’s share is below ?50 lakh. The tax will be calculated on the total amount paid.
Impact: This amendment, effective from October 1, 2024, serves as a clarification to prevent TDS avoidance on property sales, ensuring the tax is deducted correctly and reducing the risk of misinterpretation of the income tax laws.
13. Aadhaar enrolment number cannot be quoted in ITR and PAN application forms?
Budget 2024 has made it mandatory for individuals to provide their Aadhaar number when filing income tax returns (ITR) or applying for a PAN. Previously, since 2017, individuals without an Aadhaar number were allowed to quote their Aadhaar enrolment number on these forms. However, starting from October 1, 2024, this option will no longer be available.
Impact: From now on, having an Aadhaar number will be essential to file an income tax return or apply for a PAN. Individuals without an Aadhaar number will not be able to file their ITR or apply for a PAN, even if they have the Aadhaar enrolment number.
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14. Introduction of Vivad se Vishwas Scheme 2.0?
The government has reintroduced the Direct Tax Vivad Se Vishwas Scheme to resolve ongoing disputes between taxpayers and the income tax department.
Impact: The scheme, which has been notified by the income tax department, came into effect on October 1, 2024. Taxpayers involved in litigation with the income tax department can use this scheme to settle their issues. However, the government has yet to announce the closing date for the scheme.
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15. The time limit to open old ITRs has been revised?
The government has shortened the time limit for reopening old income tax returns (ITRs) in specific cases. According to the new amendment, if the income escaping assessment exceeds ?50 lakh, the income tax department now has up to 5 years from the end of the assessment year to open old ITRs. Previously, until August 31, 2024, the department had up to 10 years to do so.
Impact: This amendment is designed to reduce litigation and provide more clarity, thereby decreasing tax-related uncertainty for taxpayers.