In today’s Finshots, we’re breaking down the major highlights of the Budget for you.

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The Story

The sequel to February’s Interim Budget has finally arrived. The Interim Budget was just a placeholder, keeping things steady until a new government took charge. And now that the old crew is back, albeit through a coalition, the Full Budget for FY25 is here to lay out the financial roadmap.

So, what’s new in this edition, you ask?

Well, there are quite a few things. But let's focus on the highlights that really matter.

Let’s begin with the government’s efforts towards encouraging employment.

See, India’s employment scene is a mixed bag. While the number of employed people has gone up by 3% over the past seven years, the unemployed crowd has grown by 12%. The main issue? Job creation hasn't kept pace with the rising number of job seekers.

So, the government stepped in with three new employment-linked incentive schemes aimed at both employers and employees.

The plan is to pay newly employed folks registered under the Employees’ Provident Fund (EPF) their first month's salary, up to ₹15,000, if they earn up to ₹1 lakh a month. Plus, employers get reimbursed up to ₹3,000 per month for two years for EPF contributions for each new hire. There’s also a similar deal for the manufacturing sector with slightly different rules.

This approach isn't just about creating 50 lakh more jobs, but also about encouraging the youth to upskill through government training programs, making them eligible for that extra first month's pay. And if you’re wondering how that’s going to happen, the government has a plan for that too. It intends to skill 20 lakh youth through 1,000 upgraded Industrial Training Institutes over the next five years. And there’s a government-backed loan scheme to help 25,000 students with financial assistance for these programs.

And it hasn’t forgotten about women in the workforce. Post-COVID, female employment in India took a nosedive, dropping by 9% in 2022. That was like being on the same footing as war hit Yemen. Sure, women’s participation in the workforce has improved from 23% to 37% between FY18 and FY23. But it's still far from ideal. So the government’s solution is to set up working women's hostels and creches to help them balance work and home duties, ensuring that this upward trend continues.

Next up, let’s talk about the government’s goodies for companies and the startup ecosystem. It has slashed corporate tax rates on foreign companies from 40% to 35%.

But the big highlight? The changes to the angel tax.

For the uninitiated, in the 2012 Budget, the Finance Minister introduced a new tax to crack down on shady transactions disguised as investments in private companies. If domestic investors bought shares in unlisted companies at prices higher than their fair market value, those companies had to pay tax on the excess amount.

This move was aimed at widening the tax base and tackling black money but ended up hurting startups. These fledgling companies, already struggling to find investors, had to reserve a big chunk of their initial funding for hefty tax bills, limiting their operational capital.

Over time, the government introduced exemptions to ease the burden. But last year, Finance Minister Nirmala Sitharaman dropped a bombshell in her Budget speech. The government removed the angel tax exemption on foreign investments, effective April 1st, 2023. So, startups receiving funds from individual foreign investors had to pay an angel tax if shares were issued above fair market value.

This change had startups in a frenzy, not just because of the potential tax hit but also due to valuation confusion. Valuations under the Foreign Exchange Management Act and the Income Tax Act could be different, making the tax implications even murkier.

This, combined with the existing startup winter, caused funding to plummet to just $11 billion, which was a whopping 70% lower than FY22. Seeing the dire situation, the government stepped in and rolled back the angel tax for all types of investors. Hopefully, this move will help more startups get the funding support they need going forward.

Then there’s also something for India’s diamond cutting and polishing industry. 14 out of 15 diamonds set in jewellery worldwide are cut and polished in India. And that makes us a world leader. This means that the sector employs a vast number of skilled workers who turn rough diamonds into dazzling gems.

But there was a snag ― unpredictable tax rates for foreign mining companies selling raw diamonds here. To fix this, the Finance Minister introduced safe harbour rates.

Let’s break it down. Imagine that Glow, a foreign mining company, sells raw diamonds to Sparkle, an Indian firm. Normally, without safe harbour rates, the tax authorities would scrutinise the deal to ensure that the price of the raw diamonds is fair and not manipulated to avoid taxes. This process could be lengthy and complex, involving potential disputes over the fair market value of the diamonds.

But now, the government says “Let’s introduce safe harbour rates.” So it sets a safe harbour rate, specifying that raw diamonds sold by foreign companies to Indian companies will be taxed at a predetermined rate, say 10%. So if Glow sells diamonds to Sparkle for ₹10 lakh, it applies the 10% safe harbour rate, paying ₹1 lakh in taxes. This predictability means no more lengthy audits or disputes for Glow.

For India, it attracts more raw diamond imports, supports local craftsmen and fosters a stable business environment. It’s a win-win for everyone! But yeah, that 10% rate was just an example. The actual rate slabs are yet to be announced.

And finally, the part you’ve probably been waiting for ― What's in it for folks like you and me in terms of personal income taxes?

There’s nothing new for those sticking with the old tax regime. But for those opting for the new tax regime, there are a few tweaks.

First, if you're salaried, the standard deduction or the tax break you get to reduce your taxable income has increased from ₹50,000 to ₹75,000 (or from ₹15,000 to ₹25,000 if you earn an income from the pension of a deceased family member). According to the Finance Minister, this will benefit 4 crore salaried taxpayers and pensioners.

Second, the tax rates have been adjusted. Previously, there was no tax on income up to ₹3 lakhs, 5% on income between ₹3 lakhs and ₹6 lakhs, 10% on income between ₹6 lakhs and ₹9 lakhs and 15% on income between ₹9 lakhs and ₹12 lakhs. Now, the 5% rate applies to income between ₹3 lakhs and ₹7 lakhs, the 10% rate covers ₹7 lakhs to ₹10 lakhs and the 15% rate starts at ₹10 lakhs and goes up to ₹12 lakhs. The rest remains the same.

Third, you can save taxes by claiming deductions on the contribution your employer makes on your behalf to the National Pension Scheme (NPS). Previously, employees working for central or state government companies could claim a deduction of up to 10% of their salary for these contributions. But now that has been bumped up to 14%, whether you work in the private or public sector.

And all these benefits come with a few trade-offs. First, capital gains taxes have gone up. If you sell listed stocks or equity mutual funds within a year, you'll now pay 20% instead of 15%. For similar investments held longer than a year, the tax is now 12.5%, up from 10%. The indexation benefit on Real Estate investments is gone. This means you cannot adjust your purchase price based on inflation while calculating the capital gains you made. However, the long term tax rate has come down from 20% to 12.5%.

Second, if a company buys back its shares and you participate, you'll now pay the tax on this income yourself at the applicable tax rates. Previously, the company took care of this tax.

Lastly, trading in futures and options just got a bit pricier, as the government has bumped up the transaction tax rates here too.

So yeah, this Budget might not seem super exciting. But to reduce the gap between its receipts and expenditure, the government needs to do a balancing act. It has already aimed to bring the fiscal deficit down to 4.9% of GDP (Gross Domestic Product) from the 5.1% expected for FY25 and it's targeting 4.5% by FY26. This is probably the best it can do to keep both taxpayers and itself happy.

What do you think?

Correction: In an earlier version of this story, we mentioned that the standard deduction for pensioners was increased from ₹15,000 to ₹25,000. We’ve now corrected it since this change actually applies to family pensioners. We've also rephrased the section on taxes related to buybacks. We regret the error.

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