What Union Budget 2024-25 means for the economy and the insurance sector

Reduction in TDS levy on agents' commissions, bonus and maturity proceeds will ensure greater liquidity for agents and policyholders

Expectations were running high ahead of Union Budget 2024.

Living up to the mercury of excitement, Finance Minister Nirmala Sitharaman in her budget speech outlined nine priorities that are likely to generate ample opportunities in India's journey towards a ‘Viksit Bharat’ (developed India).

After the huge dividend payout by the Reserve Bank of India (RBI) and amid the K-shaped recovery after COVID-19 and the return of the Narendra Modi government for the third straight term, some announcements to boost consumption and also to support the rural economy were expected.

Given this backdrop, the government’s resolve to stick to the fiscal consolidation path and to be judicious with the expenditure is commendable. The full Budget on July 23 focussed on fiscal consolidation by lowering the fiscal deficit further to 4.9 percent of the GDP against 5.1 percent presented in the Interim Budget on February 1, with a focus on infrastructure investments and inclusive development.

The big question heading into the Budget was on how the government would use the revenue windfall of around Rs 1.2 trillion that it received as dividend from the RBI. The government has been prudent here and has partially used this fund to reduce the fiscal deficit while the rest has been used to boost revenue expenditure largely through higher grants and aid to states and through the new employment incentive schemes and for skill development.

Measures to boost job creation

A solid labour market is vital to structurally improve demand and consumption. Here, the government has outlined its roadmap for creating 4.1 crore jobs over the next five years with an outlay of Rs 2 trillion, which would set the stage for sustainable economic growth and job creation. This, along with tweaks to income tax slabs and increase in standard deduction is likely to support consumption at the margin. However, there has been no increase in allocation for rural housing scheme compared to the Interim Budget even as urban housing scheme has seen modestly higher allocation.

With an objective to simplify and rationalise tax structure and to improve financial vigilance, the government revamped the capital gains tax regime, across both short term and long-term holdings. Some notable changes are an increase in shorter-term capital gains from 15 percent to 20 percent on listed equities and increase in the long-term capital gains tax from 10 percent to 12.5 percent, excluding the surcharge, for listed equities and some other financial assets.

Real estate also saw some changes. While long-term capital gains taxes were reduced from 20 percent to 12.5 percent, the inflation indexation was done away with.  Finally, the Securities and Transaction Tax (STT) was increased given the surge in the Futures and Options (F&O) volumes seen in recent months.

Tax tweaks to help insurance agents and policyholders

Rationalisation of tax deducted at source (TDS) from 5 percent to 2 percent for payment of insurance commission to individual agents will ensure additional income in the hands of such individuals for payments made by the insurers. TDS reduction to 2 percent for payment of bonus or proceeds made on life insurance policies upon maturity will also ensure higher payout for individual policyholders.

The proposed abolition of the angel tax marks a significant milestone for domestic companies, which have faced both legal and practical challenges under these contentious provisions. This is a big step towards enhancing tax certainty and enhancing the startup ecosystem.

Also read: TDS on life insurance payouts reduced from 5% to 2% from October 1

MSMEs are at the cornerstone of the government’s initiative of ‘Viksit Bharat’. The Budget addressed funding requirements of MSME sector by doubling the limit of ‘Mudra loans’ from Rs 1 million to Rs 2 million. A credit guarantee scheme was also launched for MSMEs in the manufacturing sector, which will operate on pooling of credit risks of such MSMEs. Further, the finance minister also announced setting up of a ‘Critical Mineral Mission’ for domestic production, recycling of critical minerals, and overseas acquisition of critical mineral assets.

Agriculture in focus

Agriculture was the other big focus of the budget. Government proposed a Rs 1.52-trillion outlay for agriculture and related sectors this year to boost sustainable farming practices and to implement digital public infrastructure in agriculture.

Overall, the Union Budget FY25 presents a balanced approach to fostering economic growth while maintaining fiscal prudence.  The government has stepped up measures to boost formal sector employment for youth by EPFO contributions, employment incentives and support in internships. From an investment perspective, the focus on infrastructure, technology, sustainable development, skill development and ease of doing business steers India on the path of sustained growth.

This would lay the foundation and give a blueprint to transform the economy over the next 25 years—from India at 75 to ‘Viksit Bharat’ at 100.