Budget 2022 and Your Money: What the FM's announcements mean for investors

Finance Minister Nirmala Sitharaman on Tuesday did not hand out any major tax benefits for individual tax-payers during her Budget announcements.

However, for investors in cryptocurrencies, it turned out to be an eventful Budget. The finance minister’s announcement on tax on virtual or digital assets offers some clarity on the way forward for such investment avenues that many Indians, especially millennials, have taken fancy to.

This apart, there are some proposals will have a direct bearing on your finances next financial year. Here are key changes that Budget 2022 is set to usher in.

Cryptocurrencies now in the tax net

In Budget 2022, finance minister Nirmala Sitharaman provided clarity on how digital assets will be taxed. This means that gains from cryptocurrencies will now be taxed. At present, there are no explicit provisions dealing with taxation of cryptocurrencies under the income-tax act, 1961, given that the Cryptocurrency Bill is pending a debate in the Parliament. In the budget speech, finance minister proposed that income from transfer of any digital asset (this is likely to include cryptocurrencies and non-fungible tokens or NFTs) will be taxed at 30 percent. No expenditure of any expenditure, except cost of purchase, will be allowed. “No set off of loss from sale of virtual digital capital asset against income under other provisions of the Income-Tax Act will be allowed and such loss shall not be allowed to be carried forward to subsequent assessment years either,” says Mayur Shah, Tax Partner, EY India.

Also note, that income earned from virtual assets (including cryptocurrencies) will be taxed from April 1, 2021 onwards. This means gains made in the current financial year, too, is proposed to being taxed. While a large section of crypto investors and industry officials are joyous that the Budget mention of virtual assets means that the government has accepted the existence of cryptocurrencies, many others say the announcement takes a harsh stand. “My first impression is that it is punitive in nature. Not allowing any deduction or set-off against losses to calculate tax on crypto gain is not in line with the tax regimes around. Trading in crypto has been, in essence, declared as an isolated transaction for an individual, which will be taxed irrespective of the overall losses. Only deduction allowed is the cost of acquisition. Further, it is to be seen, whether such tax would be specific to the type of cryptocurrency/NFT traded or the calculation will, at least, allow people to set-off the loss on any other cryptocurrencies / NFTs traded. TDS of 1 percent has been introduced to collect data on people’s trading. More clarity will be available once the text of the provision is put out in the public," said Sameer Jain, Managing Partner, PSL Advocates & Solicitors.

Second chance for tax-payers with faulty I-T returns

Forgot to include your foreign income or saving bank account interest in the income tax return? Did you not share the capital gain statement with the chartered accountant before filing the tax return? Then the Finance Minister has proposed to allow an updated return facility. An individual can use this facility to pay certain tax based on the income that was omitted from the tax return that has been filed. One can file an updated return within two years from the end of the assessment year. But if there has been a search on the individual or his office and undisclosed income is found, then they wouldn’t be allowed to set off that income under the updated return. Keep in mind that you will have to pay additional 25 percent or 50 percent as additional tax on the tax and interest due on the additional income that is furnished.

LTCG surcharge on financial assets capped at 15%

The finance minister announced the capping of the surcharge on the long-term capital gains payable on capital assets, at 15 percent. This is expected to benefit taxpayers in high income tax slabs as well to investors in equity shares of start-ups. Earlier, the surcharge on LTCG was capped at 15 percent in case of listed stocks and equity mutual fund. Now the same gets extended to all long-term capital assets. This should benefit taxpayers with income more than Rs 2 crore per year and have income in the form of long term capital gains. Many high networth individuals invested in unlisted stocks and start-up companies. They will get taxed at a relatively lower rate on the LTCG realized on the sale of their unlisted shares. The finance minister has not changed the holding tenure for qualifying an asset as a long term asset, nor has she changed the base tax rate on the long-term capital gains.

Higher tax deduction at source (TDS) for non-filers

If you have not filed your tax return last year, then apart from other penal charges and losses, you would also have to pay a higher rate of tax deducted at source  (TDS). To broaden the tax base, the Finance Ministry has proposed a higher rate of TDS for those who have not filed their tax returns for the past one year. Starting July 1, 2021, the TDS rate was 5 percent or double for those who didn’t file returns for the past two assessment years.  TDS is applicable on bank account and deposit interest, stock and mutual fund dividends, property sale, rental income, NRI payments and high value sales. They range from 1-20 percent. As part of Budget 2022 announcements, profits from virtual digital assets or cryptocurrencies, too, have been subjected to 1 percent TDS.

State governments’ NPS contribution for employee tax-exempt up to 14%

Now, state government employees can claim tax break on their employers’ contribution to their National Pension System (NPS) of up to 14 percent of their basic salary and dearness allowance.

Until now, this was capped at 10 percent for state government and private sector employees. Finance Minister Nirmala Sitharaman on Tuesday raised this tax exemption limit under section 80 CCD (2).

So far, only central government employees enjoyed this additional benefit. Now, there is parity between state and central government employees. This benefit, offered under section 80CCD (2) will be available under both the tax regimes.

For private sector employees, the ceiling continues to be 10 percent.

Ease of accessing funds for the differently-abled

Under section 80DD, any amounted deposited by a tax-payer (parents or guardian) towards an insurance policy for maintenance of a differently-abled dependent is allowed as a tax deduction. However, this benefit is allowed only if dependent receives this annuity or lump-sum under the policy after the parent or guardian’s death. If the differently-abled dependent were to die before the parents or guardians, the premium paid until then is treated as the policyholder’s income and taxed accordingly. The FM has announced that the tax break will now be allowed even if the proceeds are received during parents’ lifetime, but after they turn 60.

“There could be situations where differently-abled dependents may need payment of annuity or lump-sum amount even during the lifetime of their parents/guardians. I propose to thus allow the payment of annuity and lump-sum amount to the differently-abled dependent during the lifetime of parents/guardians, i.e., on parents/ guardians attaining the age of sixty years,” she said in her Budget speech.

ESG investing gets a push with sovereign green bonds

The finance minister has announced the idea of raising money by issuing green bonds. The proceeds of the sovereign green bonds will be deployed in public sector projects which help in reducing the carbon intensity of the economy. Though the details of these bonds will be announced in the due course. It can be an important instrument to channelise savings of investors who are keen to support environmentally responsible projects. ESG –environmental, social and governance focused portfolios of global investors may want to take a look at this offering. Even Individual investors keen to invest in these bonds can do so if the bonds are made available for public at large through RBI Retail Direct.