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Key budget announcements in Modi 2.0’s last financial document you can’t miss

The interim budget for 2024-25 is being seen as an economic manifesto for Prime Minister Narendra Modi’s ruling Bharatiya Janata Party (BJP) and will give cues to the market on its plans for fiscal consolidation, borrowings and future taxation policy.

What India’s common man gets in Budget

Finance Minister Sitharaman outlined initiatives for the next five years, including increased housing, expanded access to free electricity, and enhanced medical care, especially for women. Sitharaman pledged support for key sectors targeted by Modi, such as farmers, youth, women, and the impoverished, as the country looks towards ‘unprecedented development’ in the next five years.

The government has this time decided to widen the horizon of housing scheme. It will be launching the ‘Housing for Middle Class’ scheme to encourage middle-class individuals to purchase or construct their own homes. Over two crore additional houses have been added to the existing target of three crore under PM Awas Yojana.

The government has also decided to accelerate Saksham Anganwadi and Poshan 2.0 programs to enhance nutrition delivery, early childhood care, and development, said Sitharaman.

Sitharaman said that the government has enabling one crore households for rooftop solarization, providing up to 300 units of free electricity per month.

What Indian industries received

Sitharaman’s interim budget unfolded a series of impactful measures set to provide a robust impetus to various sectors, fostering economic growth and development across the nation.

Giving a thrust to the Production-Linked Incentive (PLI) scheme, the government allocated Rs 6,200 crore to incentivize manufacturing and boost industrial output. To stimulate the tourism sector, projects for port connectivity, infrastructure, and amenities on India’s islands, including Lakshadweep, are in the pipeline. Budget 2024 also focused on expanding railway corridors and increasing the number of Vande Bharat trains in India.

A comprehensive program for supporting dairy farmers is on the horizon, building on the success of existing schemes. Efforts to control foot and mouth disease and increase the productivity of milch-animals align with the goal of fortifying India’s position as the world’s largest milk producer.

The agriculture sector witnessed a strategy for self-reliance in oilseeds production. The adoption and expansion of Nano Urea and Nano DAP applications on crops was also announced.

In the defence sector, a new scheme will be launched for strengthening deep-tech technology. Allocation for defence in the interim budget has been increased to Rs 6.21 lakh crores for the financial year 2024-25 from Rs 5.94 lakh crores allocated for the last year. The increase is over 4.5 per cent from last year.

Expanding healthcare coverage under the Ayushman Bharat scheme to ASHA workers, Anganwadi Workers, and Helpers is a significant step towards ensuring a more inclusive and comprehensive healthcare system. The vaccination initiative for cervical cancer has also been announced.

The extension of the RoSCTL scheme for the apparel industry until March 31, 2026, provides stability and incentive for long-term planning.

With a remarkable increase in the capital expenditure outlay, the focus on infrastructure development is evident. The capex allocation stood at Rs 11.11 lakh crore for the next year.

Taxes and more

The interim budget had no significant announcements regarding the income tax slabs for the upcoming financial year, 2024-25.

Under the income tax laws, an individual (not having any business income) is required to choose between the new and old tax regimes every year. Hence, an individual can choose the new tax regime one year and the old tax regime the next.

Contrary to this year, a large number of changes were made in Budget 2023 in the new tax regime. The income tax slab changes announced in Budget 2023 are effective for the financial year between April 1, 2023, and March 31, 2024, and are set to remain unchanged for FY 2024-25 (April 1, 2024 and March 31, 2025).

The budget has provided insights into the party’s strategies for fiscal consolidation, borrowing, and forthcoming taxation policies, offering valuable clues to the market.

However, the Sitharaman has announced an income tax amnesty for taxpayers having outstanding direct tax demand disputes with the income tax department. As per the announcement, outstanding direct tax demands up to Rs 25,000 till financial year (FY) 2009-10 and up to Rs 10,000 between FY 2010-11 and FY 2014-15 will be withdrawn.

In layman terms, this means that taxpayers having pending tax demand disputes up to the limit announced for the specified financial years would be eligible for this benefit.

Allocations to major schemes

• Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGA): Allocation hiked to Rs 86,000 crore for FY25 from Rs 60,000 in FY24, a 43.33 per cent increase.

• Ayushman Bharat-PMJAY: Allocation hiked to Rs 7,500 crore for FY25 from Rs 7,200 crore in FY24, a 4.2 per cent increase.

• Production Linked Incentive Scheme (PLI): Allocation hiked to Rs 6,200 crore for FY25 from Rs 4,645 crore in FY24, a 33.48 per cent increase.

• Modified Programme for Development of Semiconductors and Display Manufacturing Ecosystem: FY25 allocation hiked to Rs 6,903 crore from Rs 3,000 crore in FY24, a 130 per cent hike.

• Solar power (GRID): FY25 budget estimate hiked to Rs 8,500 crore from Rs 4,970 crore in FY24, a 71 per cent increase.

• National Green Hydrogen Mission: Allocation for FY25 hiked to Rs 600 crore from Rs 297 crore in FY24, an increase of 102 per cent increase

Source- Economictimes

Budget 2024: How can Modi govt further give filip to tax administration using digital initiatives?

A steady transformation has been happening at India’s tax administration over the last 10 years, preparing India for its ‘Amrit Kaal’. This is best reflected through the broadening tax base and increasing collection. For direct taxes, the number of income tax returns filed (including revised returns) has increased by ~105% between FY 2013-14 and FY 2022-23 and the net direct tax collection is set to breach Rs 19 lakh crore in FY 2023-24 (~3 times the value in FY 2013-14). On the indirect tax front, over the last 6 years the number of entities registered to pay GST have doubled to 1.4 crore, while GST collections have been steadily improving with the highest collection for a month being recorded in April 2023 at INR 1.87 lakh crore.

Digital Initiatives: Core of the reforms

While several legislative and administrative initiatives have spearheaded this dynamic transformation exercise, the aggressive use of digital technologies to improve transparency, simplify processes to boost efficiency and citizen experiences, cannot be understated. Pivoted on critical national digital infrastructures, including the improved income tax portal (TIN 2.0, pre-filling of ITRs, and updated returns, PAN-Aadhaar interoperability etc.), Goods and Services Tax Network (GSTN: GST Portal, E-way bill system, E-Invoice System, TINXSYS etc.) Indian Customs Electronic Gateway (ICEGATE 2.0) etc., the Government of India has rolled out several state-of-the-art digital services and communication channels to enable a tax administrative culture and ecosystem that is taxpayer centric.

The success of the initiatives is a modern day ode to the adage, “the numbers speak for themselves”. For instance, since its inception, more than 425 crore e-way bills have been generated by the E-Way bill system; close to 5 lakh GSTINs have been generating Invoice Reference Numbers (IRN) through the e-invoice system with the number of IRNs crossing 18 lakh in May 2023. In case of direct taxes, the new income tax portal processed ~23% of ITRs for AY 2023-24 in a single day and the average processing time has been reduced to 10 days.

What’s next?

It is beyond doubt that sustained efforts towards digitisation have created a mature digital ecosystem which now begs the question, what’s next?

To assess and define the digital maturity required for tax administration in the age of rapid digitisation, OECD has laid down a possible vision for the future state of tax administration as “Tax Administration 3.0”. It identifies six core building blocks with the potential to remove structural limitations of current systems and move into integrating taxation into natural/native systems used by taxpayers, thereby ensuring compliance by design, seamless citizen experience and removing single points of failures. In other words, the OECD prescription for the future of tax administration is to design systems for a “world of driverless cars, from the current world of human-driven cars”.

A cursory mapping of the digital initiatives undertaken by the Government of India, to the six core building blocks prescribed by the OECD, indicates that most of the building blocks have generally already been laid down in India, other than distribution of tax laws in administrable formats to allow taxpayers to integrate tax rules with their own systems. Having most of the core building blocks, it is imperative to design and roll out digital systems and initiatives to move towards the future. While the transition will have multiple initiatives, there are two that have the potential to kick-start such a transformation roadmap.

SAT-F: Improved efficiency

A system of taxation through natural/native systems and compliance by design, requires standardisation and automation of data sharing by taxpayers with tax administrators. At present, data extraction from business systems for assessments by taxpayers and its validation by tax administrators, is often manual which opens up possibilities for inadvertent errors, and delays/inconsistencies in reporting and data verification. It may be feasible to consider introduction of Standard Audit File for Tax (SAF-T), an OECD standard that has been adopted by many European countries, for both, direct and indirect taxes. SAF-T involves creating a data file containing business accounting transactions in a standardised format. This benefits taxpayers as the process of data submission to tax authorities can be automated. From the tax administration perspective, a SAF-T file could significantly enhance and automate the tax audit process on a near real-time basis, with least interference for taxpayers.

Unified Digital Infrastructure for One-Stop Filing

Also, mandated by different legislations viz., company law, foreign exchange regulations, direct and indirect taxation laws, taxpayers have to do multiple filings that carry similar type of data. For instance, financial data (balance sheet and profit and loss statements) is required for filings under company law as well as for ITR Forms; GST data is available in GST returns but is also required to be reported in clause 44 of Form 3CD (Tax Audit Report). Apart from creating duplicity of efforts for taxpayers, this also prevents effective interoperability between tax administration and regulatory enforcement which needs to be removed for a seamless and delightful citizen experience. Hence, a unified digital infrastructure that can enable automated filings can bring down the compliance burden and dismantle information silos within the administrative ecosystem.

Timely roll-out of these two initiatives can speed up the pace of digitisation and pave the way for the next generation of tax administration.

Source- Economictimes

HDFC Bank share crash and the perils of equity funds that hug their benchmarks

The sharp 11 percent fall in the share price of HDFC Bank over the last two days has again raised questions over actively managed mutual funds mirroring their respective benchmarks in the Indian asset management industry.

HDFC Bank is among the most-owned stocks in the Indian equity markets. To put things in perspective, there were 539 mutual fund schemes, including active and passive, with a total investment of Rs 2.17 lakh crore in the private sector lender as of December end.

Of this, 420 schemes are actively managed with assets under management (AUM) of Rs 1.36 lakh crore, as per data available with Value Research.

This is probably because HDFC Bank has the highest weightage in the Nifty 50 index among all the stocks, at 13.52 percent. These weightages can change with different benchmarks. For example, HDFC Bank has 11.31 percent weightage in the Nifty 100 index and 29.39 percent in the Nifty Bank index.

While passive schemes such as exchange-traded funds (ETFs) and index funds have to adhere to the assigned weightages while constructing portfolios, active funds can alter their allocations based on fund managers’ judgement.

These weightages can then, in turn, have a proportionate impact in terms of returns.

Schemes with biggest impact

On January 17 and January 18, shares of HDFC Bank slumped more than 11 percent in total, eroding nearly Rs 1.5 trillion of investors’ wealth.

Returns-wise, passive sectoral funds based on the banking and financial services theme took the biggest hit on January 17 due to their large exposure to HDFC Bank. Schemes such as ICICI Prudential Nifty Bank ETF, Kotak Nifty Bank ETF, SBI Nifty Bank ETF, HDFC Nifty Bank ETF, and Axis Nifty Bank ETF slumped more than 4 percent, as per data available with ACE MF.

In terms of exposure, SBI Mutual Fund has the biggest investment in HDFC Bank, both via active and passive schemes, at Rs 62,416 crore, or 7.04 percent of the overall portfolio. To be sure, its largest scheme, the SBI Nifty ETF, is where the Employees’ Provident Fund Organisation’s (EPFO) incremental corpus gets invested. This is followed by HDFC MF at Rs 24,432 crore, or 4.19 percent of the portfolio, and UTI MF at Rs 21,626 crore, or 7.64 percent.

It has been seen that many actively managed funds choose to align their scheme portfolios with the respective benchmarks. But is that a good strategy?

Perils of benchmark hugging

Actively managed schemes such as Baroda BNP Paribas Banking and Financial Services, LIC MF Banking & Financial Services, Kotak Banking & Financial Services, and HDFC Banking & Financial Services took major hits on January 17.

Even when it comes to diversified schemes, those such as Tata Large Cap, SBI Bluechip Fund, and Bandhan Large Cap Fund, with their holdings of around 10 percent in HDFC Bank, fell up to 2 percent each on the day.

According to Nirav Karkera, Head of Research at Fisdom, most actively managed mutual funds have kept a mandate that they will not be completely divergent from the benchmarks.

“From a risk standpoint, even if funds don’t see value in a stock, they don’t want to completely avoid exposure to something that is heavily represented on the index,” he said.

“However, (we should) understand that many fund managers target relative performance. Managers need to generate alpha, which is outperformance over the benchmark. In such a case, it is difficult to deviate significantly from the benchmark through exclusions. However, many have historically delivered superior returns through active management. So, constituent overlap with benchmarks and deviations through weightages are also practices that have worked for many,” Karkera said.

Some funds have less exposure to HDFC Bank in their portfolios. For example, schemes such as ICICI Prudential Balanced Advantage, Kotak Flexicap, and HDFC Balanced Advantage have exposure in the range of 4-6 percent to the private sector lender.

Though rare, some mutual funds, such as Quant Mutual Fund, don’t have any allocations to HDFC Bank.

To be sure, mirroring or diverging from the benchmark doesn’t guarantee better returns, as mutual funds generate returns via stock selection and then timing the entry and exit.

Kirtan Shah, Founder of Credence Wealth Advisors, says that in the active mutual fund space, there are two types of fund managers: one, who are largely index-hugging with a little change here and there, and two, those who take very bold calls. “In the active space, you really want to be with somebody who takes active strategies, actively,” Shah said.

Can funds ignore benchmarks?

Fund managers try to align their portfolio weightages to the respective benchmarks, as a mutual fund is a relative-return product and performance is relative to the benchmark.

“Funds cannot entirely eliminate a stock (that is, not invest anything in it), especially a stock like HDFC Bank, which has delivered consistently over the last 25 years. They have very little reason to do so. At best, they can tweak the allocation based on their preferences. HDFC and HDFC Ltd (erstwhile), have been bellwether stocks, belonging to a sector that was consistently growing and tightly tied to the India growth story. The merger between the two would have led to an increase in overall exposure,” said Deepak Chhabria, Chief Executive Officer & Director of Axiom Financial Services.

How should you react?

The answer: No.

While investing in mutual funds, reacting to the day-to-day performance of underlying stocks can be counterproductive. There are thousands of stocks on the exchanges, and they trade for around 250 days a year.

“Judging a mutual fund scheme based on a single month-end portfolio is also difficult. A scheme may hold a stock for 29 days and sell it on the last day, which would not reflect in the factsheet. So, you cannot look purely at the stock weightages and make a decision. The whole idea is that such events (the HDFC Bank stock fall) will keep happening; investors just need to stay the course and stay wiser,” said Amol Joshi, Founder, PlanRupee Investment Services.

To achieve a diversified portfolio, it’s advisable to include both active and passive funds. For successful mutual fund investments, knowledge about asset allocation and market timing is essential.

And the next time a bellwether stock falls on a given day, just stay invested. Keep monitoring, though.

Source- Moneycontrol

Piyush Goyal says US fund house looking to invest $50 billion in India

US-based fund house is looking to invest about $50 billion in India in the next 10 years, a reflection of the country’s strong macroeconomic fundamentals, commerce and industry minister Piyush Goyal said Friday.

“They said we have invested about $13 billion so far, we expect it to double it in the next four years and then double the figure… in the next four years… just one fund,” Goyal said at the ET NOW Leaders of Tomorrow Awards. He termed the firm “one of the most prominent” investment houses of the US but didn’t disclose its name.

Goyal said it shows the excitement of global investors over India, which is the fifth largest economy and no more part of the Fragile Five. Forex reserves have soared to over $600 billion and the government is focusing on modernising India’s infrastructure–rail, roads, ports and airports. The comment followed his post on X earlier in the day: “Discussed the ‘India opportunity’ in my meeting with Mr. Henry R Kravis, Co-Founder and Co-Executive Chairman of KKR, a leading global investment firm from New York.” Goyal emphasised that the world today wants to engage with the country on the trade front and negotiate free trade agreements as India is emerging as a large and trusted partner.

“That is the excitement about India today,” he stated. “The fact that today we are the fifth largest economy of the world, no more counted as a Fragile Five economy, solid foreign exchange reserves, $623 billion at the last count, management of inflation appreciated across the globe.”

From 100 startups 10 years ago, Goyal said India is now supporting 115,000 registered startups. The country is poised for high growth in the next two or three decades, taking the economy to $35 trillion.

Source- Economictimes

Inflation at a four-month high in December, industrial production at an eight-month low in November

Retail inflation rose marginally to a four-month high of 5.7% in December compared with 5.6% in the previous month, owing to food inflation inching closer to double digits, according to data released Friday.

On the other hand, industrial output expanding at its weakest pace since March 2023 rising 2.4% in November compared with 11.6% in October, pulled down by an unfavourable base and a decline in manufacturing activity during the festival month, according to another data released by the government.

Experts indicate that high inflation coupled with strong growth indicates that there may be a long pause in Reserve Bank of India’s policy stance.

“Rate cuts appear distant, and are unlikely to emerge before August 2024, with a stance change expected in the preceding policy meeting,” said Aditi Nayar, chief economist, Icra.

The Indian economy is likely to grow 7.3% in FY24, higher than previous year’s growth number of 7.2% and RBI’s forecast of 7% for FY24, according to first official estimate based on eight month data released last week.

“Strong economic growth and inflation averaging more than 5% in FY24 suggests a long pause in policy rates,” said Ind-Ra economists Sunil Kumar Sinha and Paras Jasrai.

The Reserve Bank of India held the policy rate at 6.5% for the fifth consecutive time at its meeting in December. The next monetary policy committee meeting is scheduled post the interim budget from February 6-8.

Food disturbs, core helps

The increase in retail inflation was led by food inflation, which came in at a four-month high of 9.5% in December compared with 8.7% in the previous month, but the core inflation falling below 4% for the first time in the post-pandemic period kept the effects contained.

“The upside was contained with the sustained deflation in the fuel and light category and a moderation in core inflation just below the RBI’s target of 4%,” said Rajani Sinha, chief economist of CareEdge.

Vegetable prices rose 27.6% in December owing to onion prices rising 74% in December, while tomato prices rose 33.5%.

Besides vegetables, fruits, pulses and spices all recorded double digit inflation in December.

“Despite marginal sequential moderation, food prices remained largely sticky, which drove up the year-over-year growth in December. The persistently high inflation in specific food categories, such as cereals, pulses, and spices, raises concerns about the potential broadening of price pressures,” Sinha added.

Cereal inflation, on the other hand, declined below 10% for the first time in 15 months, but concerns still remain.

“The outlook for the inflation for certain items like rice, wheat and pulses remains somewhat vulnerable, given the estimated fall in annual kharif production, as well as the YoY lag in the ongoing rabi sowing season amid El Nino conditions,” Nayar from Icra said.

Economists expect inflation pressures to ease in the coming months, given base effects and arrival of new crop.

“We expect inflation in January 2024 to decline to 5.3-5.5% range mainly due to base effect,” said Ind-Ra economists.

Output concerns

All three major sectors of industrial activity underperformed, with mining slowing down to 6.8% in November from 13.1% in the previous month, while electricity came down to 5.8%, a five-month low.

Manufacturing, which accounts for over three-fourth of the index, grew 1.2%, compared with 10.2% in October and 6.7% in November 2023.

“While an unfavourable base resulted in a broad-based growth moderation, month-on-month contraction seen in the electricity and manufacturing sectors further constrained the overall IIP growth,” said Sinha from CareEdge.

Both consumer durables and non-durables, which reflect consumption demand, showed a contraction in November of 5.4% and 3.6%, respectively. The contraction in consumer durables was much larger as the sector had expanded 15.9% in the previous month.

“Consumer goods should have picked up in the festive season but have not. This means that the scope for revival is limited. Don’t expect corporate results in this sector to do well on sales,” said Madan Sabnavis, chief economist, Bank of Baroda.

Economists contend that pre-election spending could likely aid in some revival. India is scheduled to hold general elections in the next quarter.

Besides consumption, capital goods also contracted in November.

“17 of 23 sectors showed negative growth with capital goods going down. All indicative of limited investment concentrated in metals cement and auto,” Sabnavis said.

Performance is expected to stay muted in the coming months. Ind-Ra expects the IIP growth to remain muted in the low single digits in December 2023.

Source- Economictimes

Retirement is NOT a one-time event

When it comes to retirement, we take inventory of our portfolio. But as important is taking an inventory of our lives.

Retirement is not only about getting that coveted sum of money. It can be an existential crisis.

What are you retiring from? What are you going into? When does a homemaker retire? When does one retire from being a parent? When does one retire from being the best person you can be? When does one retire from being a sibling? When does one retire from being a spouse?

Is retirement only about falling off the demographic cliff and being told not to come to work anymore? While that may be the conventional view, here’s what to remember.

Retirement is not a destination.

Retirement is not a one-time event.

Retirement is not a homogeneous phase.

We all plan for retirement. And it is crucial. How much must be the nest egg? How must the transition take place? Are you going to transition into it by going part time? Or are you going to pursue a hobby? Or are you going to make the switch to being a consultant? Or are you going to explore with a new career?

It is a new stage in one’s life, but a multi-phase journey.

Professor Robert Atchley described retirement as a transitional process over different phases.

1. Preretirement. I am so looking forward to retiring.
2. Honeymoon. The taste of freedom. Finally, I am free. I can relax, I can unwind.
3. Disappointment. Disenchantment. So this is it?
4. Reorientation. What am I doing? Who am I? What gives me meaning?
5. Stability. A new routine is established.
6. Adaptation. Lifestyle changes are made to adjust to old age and longevity.

These phases are not a sequence of events that everyone goes through. Nor are they connected with some chronological age. The duration of each phase and complexity depend on individual circumstances. But they are definitely thought provoking and serve as a useful model.

Retirement in your 60s will be quite different from retirement in your 80s. Not only will your level of activity and dependence differ, but also the financial outgo. In the initial year, travel may take predominance. Later on, the focus might be on healthcare. Each phase will have its own opportunities and challenges and moments – death of a spouse, deteriorating medical conditions, travel, marriage of children, birth of grandchildren, and so on.

Hence, while you plan for retirement, don’t forget to also plan through retirement. What sort of lifestyle do you plan to maintain? How do you plan to spend your time? What do you really plan to do once you quit the 9-to-5 routine?

You need to approach it from different perspectives: existential, financial, emotional. There is the psychological and behavioural distancing of oneself from the workforce. But there is also the reality of new social roles, expectations, challenges and responsibilities.

I reiterate what I wrote at the start: Have clarity on what you are retiring from, and what you are entering into.

Source- Morningstar

How does the transfer of shares get taxed?

Recently, one of our readers asked us about transferring shares. They asked, “What are the tax implications if I transferred shares to my spouse’s name? Does the spouse need to pay tax if they do not sell the shares? If I have it for a long term, when will it be considered long term after transfer?”

Firstly, you can transfer shares to your spouse or anyone else in two ways. Either you can transfer shares through a will/inheritance, or you can gift it to them.

The transfer process is simple. All it needs is simple online documentation and the usual transfer fee which varies from broker to broker, plus 18 per cent GST.

However, the tax-related implications of such a transfer can be significant and nuanced. The taxability of transferred shares depends on three major factors.

• The mode of transfer
• Holding period
• Cost of acquisition

Let us look at each of them separately

Mode of transfer

Taxability of gifted shares depends on whether it’s a will/inheritance or a gift. Further, it also depends on who is the recipient of these shares. Let’s look at the three possible scenarios.

• Transfer as a will or inheritance.
• In this scenario, there is no tax liability, irrespective of whether or not the recipient is a relative.
• Transfer as a gift to a non-relative.
• In this case, if the aggregate value of such shares transferred in a year exceeds Rs 50,000, it becomes taxable for the recipient.
• Transfer by way of gift to a relative.
• There is no tax liability in this case, but the definition of ‘relative’ is quite elaborate and covers the following people:
  • Your spouse
  • Your siblings and their spouses
  • Your spouse’s siblings and their spouses
  • Your parents’ siblings and their spouses
  • Your lineal ascendants and descendants, as well as their spouses
  • Your spouse’s lineal ascendants and descendants, as well as their spouses

Holding period

Next, there is the consideration of the holding period.

Stocks held over the long term and short term are taxed differently. Also, if you transfer your stocks to a relative, they become taxable only when your relative eventually sells the shares.

The combined holding period is considered to decide whether the gains are long-term or short-term. It is the period for which you hold the shares before transferring them to your relative, combined with the period for which your relative holds them before they sell them.

For example, if you bought the stocks on January 1, 2022, and gifted them to your spouse on September 1, 2022 and the latter chooses to sell these shares before January 1, 2023, the combined holding period will be considered short-term (less than 12 months).

In this case, your relative has to pay a short-term capital gains tax of 15 per cent. But if your spouse chooses to sell it after January 1, 2023 – which is more than 12 months – she’d be taxed 10 per cent, provided the gains exceed Rs 1 lakh.

Cost of acquisition

Further, you need to consider the cost of acquisition.

• If you transfer or gift your shares to a relative, then the cost of acquisition for your relative is the same as the cost at which you acquired the shares.
• If you transfer the shares to a non-relative, and the transaction is non-taxable, then the cost of acquisition for them is the same as it was for you.
• However, if you transfer the shares to a non-relative, and the transaction is taxable, then their cost of acquisition is the value of the gift, which is to be taxed.

Suppose you transfer shares worth Rs 49,999, their cost of acquisition remains the same as the cost on which you acquired the shares. However, if you transfer shares worth Rs 50,000 or more, their cost of acquisition changes to the value of the shares you gift them.

Grandfathering of gains

For those new to this term, a grandfather clause is a provision where an old rule continues to apply to some existing situations when a new rule is introduced. In all future cases, the new rule holds valid.

In this case, the grandfathering of gains applies only to equity shares and units of equity-oriented funds.

According to this clause, any long-term capital gains prior to February 1, 2018, become tax-free. However, any losses can be claimed only if they are absolute, which means if you sell your shares for lower than the buying price.

In short, grandfathering of gains boils down to what you can claim as your cost of acquisition.

Your cost of acquisition becomes the higher of
1. The actual cost of acquisition (whatever you paid to purchase the shares or units), and,
2. The lower of,

• Fair market value as on January 31, 2018.
• Sale consideration received.

Let’s look at three different examples that explain this phenomenon.

Case 1
Suppose you bought some shares on January 31, 2015, for Rs 10 each and sold them for Rs 100 each in 2023. You are now eligible for grandfathering of gains and do not have to pay any tax on your long-term gains up to January 31, 2018. The gains after January 31, 2018 are however taxable.

Case 2
Next, assume you bought these shares on January 31, 2015, for Rs 10 each. In 2018, their price increased to Rs 100 each, but in Jan 2023, their price dropped to Rs 20 each. In this case, while you will not have to pay any taxes, you cannot claim a loss either.

Case 3
However, if you bought these shares on January 31, 2015, for Rs 10 each. In 2018, their price increased to Rs 100 each, but in Jan 2023, their price went down to Rs five each; you could claim a loss and offset it.

You can look at your holdings and calculate how much gains are taxable.

Or better yet, head over to ‘My Investments’ and add your investments, and we will tell you what your gains are and how much tax liability you have.

Clubbing of income

Lastly, the clubbing of income provisions is applicable when income is generated from the asset transferred. In all the following circumstances, income from the asset is taxable for you instead of your relative.

1. When you transfer your assets to your spouse without adequate consideration except when,

• As part of the agreement to live apart
• Before marriage
• Income is received when the relationship no longer exists
• Spouse acquired assets out of maintenance money

2. Transfer of assets to your son’s wife without adequate consideration.

3. Transfer of assets to someone else without adequate consideration for the immediate or deferred benefit of your spouse or son’s wife.

In short, if you wish to gift wealth to your loved ones in the form of shares, you should do it with due consideration to the various nuances of taxation.

Source- Valueresearchonline