Budget 2022 – Provisions that affect your personal taxes

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Budget 2022 has no sops to offer you! And worse, the Government has proposed to tax your newfound love – cryptocurrencies and other forms of digital assets. Let us look at some of the key highlights on the personal finance tax.

Budget 2022, Provisions that affect your personal taxes

#1Budget 2022 to tax cryptos and other virtual digital assets

You may immediately term this a ‘Cryptocurrency Tax’, but the Budget is quicker to specifically mention Non-Fungible Tokens as part of virtual digital assets, besides giving as broad a definition of virtual digital assets as it can muster.

The Budget lays out the broad scope of the tax that will be levied on income arising from transfer of a virtual digital asset. A full understanding of the rules and how it will be implemented – and the impact of these taxes – will be clear only once the actual guidelines are out. These taxation rules will be applicable from the next financial year (2022-23 and onwards).

However, in a press conference after the budget, the government has clarified that this NEW tax regime will be effective from April 1, and that does not mean that gains from crypto transactions are not taxable today. One can possibly surmise that prevalent capital gains taxation laws apply today while this more stringent law takes effect on April 1.

Based on the Budget documents, the tax on virtual digital assets (referred to from here as digital assets) will be applied as follows:

  • Tax rate: Income from transfer of digital assets will be taxed at a flat 30%, irrespective of your tax slab. This income will be separated from all of your other incomes (i.e., salary, capital gains, other income etc), on which you pay taxes at your slab rate. Your total tax, therefore, will be the 30% paid on digital assets + the tax on all other income.
  • Calculating income from digital assets: Income here is similar to capital gains, or the excess of the sale consideration over the cost. However, there are a few provisions that set digital assets apart from all others. One, as we interpret the provisions, you will not be able to set off the loss in a digital asset against gains in any other asset or even against the gain in another digital asset. Two, you cannot carry forward such a loss to subsequent years. Bottomline – you pay a hefty tax on all gains you make, without being able to reduce that gain in any way, and you suffer all losses in full. 
  • TDS: When you make a transfer of a digital asset to a resident, TDS of 1% of the payment amount (the full sale consideration – not the gains) applies. The payment here may be wholly in the form of another digital asset or wholly in cash or partly in kind and cash. Whichever be the mode, TDS needs to be paid. This TDS will count towards the total tax you need to pay. TDS is also applicable only if the aggregate sale consideration is over Rs 10,000 in a year.

What needs clarity

The tax on digital assets brings incomes into the tax fold and is a route for the government to collect dues on gains that you may make. By taxing it at high rates with no deductions or set offs, it could also act as a check on the runaway interest and gains cryptocurrencies and NFTs are seeing.

However, the exact implementation of the rules needs a lot more clarity on the following:

  • Tracking transfers in order to make TDS payments can be tricky – both to identify a transaction and the recipient as a resident, and the onus of actually depositing the TDS with the government. Ideally, the facilitating exchange would track and execute TDS requirements, but this needs more clarity. The matter is additionally complicated as there are both exchanges and wallets, domestic and overseas, involved in the digital asset trading chain. 
  • Particularly complicated would be peer-to-peer transactions (either directly or through a P2P exchange). The law says that if person A transacts crypto assets with person B, they are required to collect each other’s PAN in order to fulfill their tax obligations. How the government will track this would be a big question.
  • How this will work with exchanges not based out of India is also an unresolved question. Technically, they will also be required to collect, report, and remit TDS on transactions conducted by Indian account holders. Will this prevent such exchanges from operating in India or support account holders from India? 
  • What constitutes the cost of acquisition also needs more understanding. There are associated costs with digital asset transactions, which contribute to the total cost.

Many of these questions are likely to be answered when a Crypto regulation bill is introduced, and such exchanges and transactions are brought into a regulatory fold. 

The news of this taxation has been received with mixed reviews by the crypto ecosystem in India. On the one hand, they are glad that there is some legal recognition for these assets, but on the other hand, they are peeved about the high taxation that almost puts their trading activity on par with gambling. 

Our view is that, overall, this is a welcome step by the government. Banning crypto assets altogether would have raised a hue and cry as being techno-regressive and unimplementable. But, clearly the government wants to temper the hyper enthusiasm of the market in these assets. A high taxation regime will achieve the latter without a punitive ban. And, of course, the government gets some revenue as well!

#2 No more bonus stripping

Thus far, stock market investors were suggested trading strategies that used bonus stripping. This simply involved buying stocks of a company before a bonus announcement, waiting for the price to fall (ex-bonus) and selling the original shares held at a loss. This loss was then used to offset gains in other instruments. And you could hold or sell the bonus shares at a later date. This loophole was closed for mutual funds under Section 94(8) of the Income Tax Act. Read more about this provision here. Now, this section is being extended to shares as well. In effect, the strategy loss booking and set off using bonus stripping (that we just mentioned above) can no longer be done with stocks.

#3 Dividend stripping extended to REITS InvITs and AIFs

Similar to bonus stripping, dividend stripping as a practice was curbed through Section 94(7) of the Income Tax Act. This section is now being extended to new investment classes like real estate investment trusts and infrastructure investment trusts besides alternative investment funds. In effect, anyone using this as a means to book losses and use them as set off will now be unable to.

#4 Tax relief for parents of disabled persons

Section 80DD of the Income Tax Act allows for deduction of expenses (medical treatment, training or rehabilitation) of a dependent person with disabilities. It also allows insurance policy premium paid for maintenance of such a disabled person provided the final amount (annuity or lumpsum) is received by the dependent only after the death of the parent or guardian who has taken the policy. 

The Budget amends this section to include deduction of premium paid for policies where the final sum or annuity can also be received when the policyholder is alive, provided he/she is above 60 years. Further, for such policies, the amount received as annuity or lumpsum later, shall not be taxed. 

In other words, the dependent will receive the benefit of such income (paybacks from the policy) even during the life of his/her parent or guardian without any taxation. This helps parents with disabled children enjoy some benefits out of their policies (and to maintain the disabled person) in their senior years.

#5 Covid relief

The Central government had provided some relief for payments received from employers or from any other persons towards medical treatment of Covid-19 or sums received towards the death of a person affected by Covid-19 under various clauses. The Budget now clarifies that such amounts paid by an employer for the medical treatment of an employee or his family shall not be treated as a ‘perquisite’. 

The Budget also proposes to add two clauses as follows:

  • Any sum received by an individual towards expenses incurred for Covid-19 for himself or his family shall not be treated as his income for tax purposes.
  • Any sum received by the family member of a deceased person (who died due to Covid-19) from the employer shall not be treated as income and will not be taxable. Such a sum has no limit. Similarly, any sum received by the family member of a deceased person, from any other source shall not be treated as income and shall not be taxed up to Rs 10 lakh. Such a sum should have been received within 12 months of the death of the person.

#6 Changes in TDS on sale of immovable property

When you buy a property (other than agricultural land), the tax laws under Section 194-IA maintain that you need to deduct TDS of 1% on the sale consideration before remitting the amount to the seller. If the sum was less than Rs 50 lakh, there’s no TDS needed.

However, the sale consideration up until now did not take into consideration the stamp duty value of the property and used only the sale consideration. The stamp duty value is usually calculated using the sale consideration. But states set a baseline value below which you cannot register a sale, even if your actual sale consideration is lower. The stamp duty value, therefore, could be higher than the sale consideration. 

The Budget provision addresses this point. The Budget provision now says that the 1% TDS will apply on the higher of the two amounts – the actual sale consideration or the stamp duty value. Therefore, if the sale amount is lower than the stamp duty value, TDS will be levied on the stamp duty value and not the sale consideration. If both the stamp duty value and the sale consideration are less than Rs 50 lakh, then no TDS is applied.

#7 Surcharge on capital gains capped

If you are a HNI, venture capitalist or founder, you might benefit from the proposed cap in surcharge on capital gains at 15%. With this, the surcharge on capital gains will be at 15% for listed and unlisted companies. Earlier such charge was 37.5% for unlisted companies. Please note that the capital gains on unlisted companies remains the same at 20%. There is no change there. This move is expected to help reduce cost of ESOP sales, private equity fund transactions and founders’ share sales un the unlisted space.

This Part 1 of the Budget 2022 covers the provisions that impact your personal finances. We’ll also be publishing a report on what the budget means (and did not mean) for the bond market as well as whether corporates benefit from the plans laid out in the Budget. Do look out!

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