Union Budget 2024: Tax reforms make India attractive investment destination

Previously, the tax rates for short-term capital gains (STCG) varied significantly across asset classes. Now, a uniform tax rate of 20% on certain financial assets aims to simplify the process and reduce compliance burdens.

The Budget has introduced tax reforms that aim to stimulate economic growth and investment in India. It reflects a forward-thinking approach to simplifying the tax structure, providing greater clarity and fostering an environment conducive to both domestic and foreign investment.

Short-term capital gains

Previously, the tax rates for short-term capital gains (STCG) varied significantly across asset classes. Now, a uniform tax rate of 20 per cent on certain financial assets aims to simplify the process and reduce compliance burdens. This uniformity is expected to encourage investors to engage in short-term trades, knowing that the tax implications are straightforward and predictable.

Long-term capital gains

For long-term capital gains (LTCG), the Budget proposes a tax rate of 12.5% on both financial and non-financial assets. This increase may initially seem harsh, compared to previous rates, but it aims at standardizing this concept. The increasing difference between short-term and long-term capital gains rates encourages investors to focus on long-term holdings, which aligns with our philosophy of building sustainable wealth. This change also moves us closer to standardising taxation across various asset classes, which could simplify the investment decision-making process for many. Additionally, the holding period for listed financial assets to qualify as long-term has been standardised at one year, while unlisted financial and all non-financial assets must be held for at least two years. These changes are designed to balance the need for long-term capital formation with a fair tax structure that rewards patient investment. 

Security transaction tax

To deepen the tax base, the Budget has increased the Security Transaction Tax (STT) on futures and options to 0.02% and 0.1%, respectively. This adjustment is a strategic move to generate additional revenue without significantly impacting trading volumes in financial markets. By slightly increasing the cost of high-frequency trading, the government aims to curb excessive speculation, while still encouraging genuine investment activities.

Taxation on share buybacks

A notable reform is the introduction of a tax on income received from share buybacks. This move aligns with international practices and aims to ensure that all forms of shareholder returns are equitably taxed. By taxing buybacks, the government addresses the potential tax avoidance by corporations that prefer buybacks over dividends due to the latter’s higher tax incidence. This reform is expected to lead to a more balanced approach to capital distribution among shareholders.

Ensuring transparency

These reforms underscore a commitment to a transparent, simplified, and equitable tax regime to develop a more investment-friendly environment, stimulate economic activity, and ultimately drive sustainable growth. As we move forward, these visionary steps will play a crucial role in positioning India as a more attractive destination for domestic and international investors.

Union Budget 2024 LIVE | Making a record for any Finance Minister, Nirmala Sitharaman presented her 7th consecutive Union Budget on July 23, 2024 under the Modi 3.0 government. This Budget brought tax relief for the middle class, while focusing on jobs through skilling, incentivising employers. Track the latest coverage, live news, in-depth opinions, and analysis only on Deccan Herald. Also follow us on WhatsApp, LinkedIn, X, Facebook, YouTube, and Instagram.