In 2024, the global economy saw uneven growth across regions. A decline in global manufacturing, in Europe and parts of Asia, was driven by supply chain disruptions and weak external demand. Conversely, the services sector performed well, aiding economic growth worldwide. While inflationary pressures lessened globally, services’ inflation remained a concern. Looking ahead to FY26, India's growth prospects appear stable amid global uncertainties, with projections ranging from 6.3 per cent to 6.8 per cent. Key growth drivers include rural demand, corporate wage improvements, and consumer confidence. India must bolster structural reforms and deregulation to enhance competitiveness. Inflation, driven by volatile food prices, remains a challenge, while the external sector benefits from a strong services trade surplus. Managing the current account deficit through stable capital inflows will be crucial for sustained growth. India has witnessed mixed capital flow trends, with Foreign Portfolio Investments (FPIs) experiencing volatility due to global market uncertainties, even as strong economic fundamentals have kept FPI flows positive. Gross Foreign Direct Investment (FDI) inflows have shown signs of recovery, although net FDI inflows saw a decline compared to the previous year, due to increased repatriation. India is striving for inclusive and sustainable growth, with a target of achieving developed nation status by 2047, while emphasising its low per capita carbon emissions. India's climate efforts are anchored in its ambitious commitment to achieve net zero emissions by 2070. The Lifestyle for Environment (LiFE) initiative promotes sustainable and circular economic practices, but international climate finance remains insufficient, with domestic resources primarily funding climate actions.

The significant changes on the direct tax side include relief targeted for middle-class individuals through an increased rebate, rationalisation of withholding tax provisions, extending the registration period for smaller trusts from five to ten years, and extending the time limit for filing updated income tax returns from two years to four years. The Finance Bill also seeks to rationalise the taxation of business trusts and harmonise the applicability of significant economic presence provisions to non-resident with those applicable to business connection. To streamline the process of transfer pricing assessment and to offer an alternative to annual examinations, a scheme is introduced for determination of arm’s length price of international transactions and specified domestic transactions over a block period of three years for similar transactions.

The government will also be introducing a New Income-tax bill next week to take forward the ‘trust first, scrutinise later’ concept. The New Income-tax bill is expected to be simple to understand for taxpayers and tax administration, leading to tax certainty and reduced litigation. Further, the government has announced the decriminalisation of more than 100 provisions in various laws.

BUSINESS TAXATION (CORPORATE & INTERNATIONAL TAX)

The corporate tax rates remain unchanged, and the budget did not address the expected implementation of the OECD's Global Minimum Tax (GloBE rules) in India.

Presumptive  taxation scheme for non-residents providing services or technology to electronic manufacturing facilities: The Finance Bill proposes a presumptive tax regime for non-residents providing tech/services to firms setting up electronics facilities under MeitY schemes #semiconductors. Section 44BBD: 25% of receipts are deemed as profit. Effective FY 2025-26.

Provisions related to carry forward of losses in case of amalgamation and business reorganization: Section 72A of the IT Act provides for carry forward and set-off of accumulated business losses and unabsorbed depreciation of an amalgamating company in the hands of the amalgamated company subject to the fulfilment of certain conditions as provided thereunder. Section 72AA of the IT Act specifies the provisions for such carry forward and set-off in the certain schemes of amalgamation concerning banking companies and government companies. The above sections provide that the accumulated loss of the amalgamating company shall be deemed to be the loss of the amalgamated company for the previous year in which the amalgamation was effected. The sections further provide that the other provisions of the IT Act relating to set off and carry forward of loss shall apply accordingly. In this context, it is pertinent to note that section 72 of the IT Act provides that business losses may be carried forward for eight immediately succeeding assessment years from the assessment year for which such loss was first computed. No more evergreening of losses in successive amalgamations. The Finance Bill amends Sections 72A & 72AA to clarify that carried-forward losses post-amalgamation can be set off only within 8 years from when they were first computed. Effective for mergers from April 1, 2025.

Harmonisation of applicability of significant economic presence (SEP): The Finance Bill amends Section 9(1)(i) to exclude purchases for export from SEP-based business connections. Non-residents buying goods in India for export won’t trigger tax liability. Effective FY 2025-26

Timelines extended for providing tax benefits to start-ups: The Finance Bill proposes to extend the benefit under Section 80-IAC of the Income Tax Act, allowing eligible startups to claim a 100% deduction on profits for three consecutive years. The eligibility period is now extended to startups incorporated until April 1, 2030, instead of the earlier deadline of April 1, 2025. This amendment will take effect from April 1, 2025.

New compliance requirement for crypto-asset transactions: The Finance Bill proposes to introduce Section 285BAA of the Income Tax Act, introducing reporting obligations for crypto-asset transactions. A prescribed reporting entity will be required to furnish transaction details, with provisions for rectifying defects within 30 days and compliance enforcement. This amendment will take effect from April 1, 2026, and relevant rules and forms to be prescribed.

CAPITAL GAINS RELATED AMENDMENTS

Amending the definition of capital asset: The Finance Bill proposes to amend the definition of capital asset under Section 2(14) of the Income Tax Act to explicitly include securities held by Category I and II AIFs and IFSC units. This ensures that income from the transfer of such securities is classified as capital gains, reducing uncertainty in tax treatment. The amendment will be effective from FY 2025-26.

Rationalisation of long-term capital gains tax for specified funds and FII: The Finance Bill proposes to increase the long-term capital gains tax rate under Section 115AD of the Income Tax Act from 10% to 12.5% for specified funds and FIIs, aligning it with the revised rate applicable to other assessees. This amendment will be effective from FY 2025-26.

ASSESSMENT AND PENALTY RELATED PROVISIONS

Change of Timelines in the Block Assessment Regime: The Finance Bill proposes the following changes for better administration of search assessments effective from February 01, 2025: 

• Extension of Time Limit: The time limit for completing block assessments will be extended from 12 months after the search to 12 months from the end of the quarter in which the search occurs. 

• Inclusion of Virtual Digital Assets: "Undisclosed income" will now include virtual digital assets (in addition to money, bullion, or valuable articles). 

• Transfer Pricing Income Exclusion: Income subject to transfer pricing provisions will be excluded from the block period and handled under other IT Act provisions.

Increase in the timeline of search assessment-related provisions: The Finance Bill proposes extending the timeline for assessing officers to retain seized books of accounts. The current limit of 30 days from the end of the month in which the assessment order was passed will be changed to 30 days from the end of the quarter in which the assessment is passed. This extension aims to provide more time for completing assessments, particularly for other group entities. The proposed change will be effective from April 01, 2025.

Change in time-limits for imposition of penalty: The Finance Bill proposes changes to the time-limits for imposing penalties under section 275 of the IT Act. Currently, multiple timelines exist depending on the type of appeal (e.g., before ITAT or CIT(Appeals)). The proposed amendment simplifies this by setting a uniform time-limit of six months from the end of the quarter in which assessment proceedings are completed. If an appeal is filed, the six-month period will begin from the end of the month in which the appellate order is received by the jurisdictional Principal Commissioner. This change will be effective from April 01, 2025.

Rationalisation regarding commencement and the end date of period stayed by the Court: The Finance Bill proposes to amend provisions under sections 144BA, 153, 153B, 158BE, 158BFA, 263, 264, and Rule 68B of Schedule-II of the IT Act. These provisions currently exclude the period during which proceedings are stayed by a court order from the time limit for completing the proceedings. The amendment clarifies that the excluded period will start from the date the stay is granted and end when the jurisdictional Principal Commissioner receives the copy of the order vacating the stay. This change will take effect from April 01, 2025.

Extending the processing period of application seeking immunity from penalty and prosecution: The Finance Bill proposes to extend the time-limit for assessing officers to process applications for immunity from penalty and prosecution under Section 270AA of the IT Act. Currently, the officer must pass an order within one month of receiving the application. The amendment will increase this period to three months, allowing both the tax department and the taxpayer more time. This change will be effective from April 01, 2025. 

Extending the time-limit to file the updated return: The Finance Bill proposes an extension to the time-limit for filing an updated return under Section 139(8A) of the IT Act. Currently, the updated return can be filed within 24 months from the end of the assessment year, but the bill extends this period to 48 months. This amendment will be effective from April 01, 2025. The additional tax payable for late filings will also increase: 

• 60% of the aggregate tax and interest for returns filed after 24 months but within 36 months. 

• 70% for returns filed after 36 months but within 48 months. 

Transfer pricing study and assessment in a block: The taxpayers provided an option to apply arm’s length price determined in an assessment proceeding in relation to the international transaction and specified domestic transaction for any previous year, to the subsequent two years for similar transactions. The scheme would not apply to ‘search’ cases. The Finance Bill proposes a new provision under Chapter X (Sections 92 to 92F) of the IT Act, allowing taxpayers to apply the arm's length price (ALP) determined for an international or specified domestic transaction for two consecutive financial years. This option can be exercised by filing a prescribed form under Section 92CA(3B). Once validated by the Transfer Pricing Officer (TPO), the ALP assessment for these years will be handled in a block, reducing the need for repetitive annual assessments. The TPO will recompute the total income based on the first year's assessment, without re-referring to the TPO for similar transactions in the subsequent years within the block. This change aims to ease compliance for taxpayers and reduce administrative burden for the TPOs. The amendment will be effective from FY 2025-26.

The scope of transfer pricing safe harbour rules is to be expanded to provide certainty on arm’s length computation of international transactions and reduce underlying litigation. The detailed rules would be prescribed separately.

The time limit of 31 March 2025 for adoption of faceless regime for transfer pricing assessment, proceedings before the Dispute Resolution Panel and Tribunal has been removed.

PERSONAL TAXATION

Revision in Tax Slabs: The Finance Bill proposes revisions to the personal income tax regime under Section 115BAC (Default (New) Regime) of the IT Act, which offers concessional tax rates if no exemptions or deductions are claimed. 

Up to INR 400,000 | Nil 

INR 400,001 to INR 800,000 | 5% 

INR 800,001 to INR 1,200,000 | 10% 

INR 1,200,001 to INR 1,600,000 | 15% 

INR 1,600,001 to INR 2,000,000 | 20% 

INR 2,000,001 to INR 2,400,000 | 25% 

Above INR 2,400,000 | 30% (excluding applicable surcharge and cess)

The budget sets a zero-tax threshold of ₹12 lakh for individuals in the new tax regime, but only salaried taxpayers get an additional benefit—a standard deduction of ₹75,000—which effectively raises their tax-free income to ₹12.75 lakh (or even up to about ₹13.7 lakh when combined with other benefits like NPS contributions). The standard deduction is available solely for salary income as per existing tax provisions, meaning non-salaried income (such as business profits or capital gains) does not receive this extra relief.

Rebate under Section 87A: The income limit for calculating the rebate is increased from INR 700,000 to INR 1,200,000. The rebate amount is increased from INR 25,000 to INR 50,000. These changes are aimed at reducing the tax burden for individuals under the new tax regime.

Increase in the upper limits for determining tax-free perquisites: The Finance Bill proposes to revise the upper limits for tax-free perquisites provided by an employer to employees. Currently, perquisites are tax-free if: The employee's salary does not exceed INR 50,000 per annum (a limit set in 2001). The employer's expenditure on medical treatment abroad for the employee or their family is not considered a prerequisite if the employee's total income does not exceed INR 200,000 (a limit set in 1993). Given that these limits have become outdated, the Finance Bill empowers the Central Government to prescribe rules to increase these limits, ensuring that more employees can benefit from tax-free perquisites. The changes will be effective from FY 2025-26.

Deduction under section 80CCD for contribution to NPS Vatsalya: NPS Vatsalya Scheme was launched on September 18, 2024 and enables the parents and guardians to start the NPS account for their minor children, which shall be handed over to the children upon attaining majority. The Finance Bill now proposes to extend the deduction under section 80CCD to NPS Vatsalya Scheme too, by providing education to parents/guardians on contribution to the account of the minor. However, the deduction is subject to a maximum of INR 50,000 as provided under section 80CCD(1B) of the IT Act. The provisions for partial withdrawal has also been proposed for the said scheme. The proposed amendment shall be effective from FY 2025-26.

Simplification in determining annual value of self-occupied property: Section 23(2) of the IT Act provides that the annual value of a house property owned can be considered as NIL if either of the following conditions are satisfied: (a) the property is self-occupied for residence by the owner; or (b) the property cannot be occupied by the owner owning to his employment, business or profession carried on at any other place. The Finance Bill proposes to simplify the provision to by removing the condition so as to enable the owner to claim the annual value as NIL if the house property is either self-occupied or cannot be occupied due to any reason. It is also proposed to extend this benefit for two houses. The proposed amendment shall be effective from FY 2025-26.

CHANGES TO THE TDS AND TCS FRAMEWORK

The Finance Bill proposes to rationalize and increase the threshold limits for various Tax Deducted at Source (TDS) provisions, with the aim of reducing compliance burdens and promoting ease of doing business. These changes will be effective from FY 2025-26 onwards. The key proposed changes are as follows: 

• Section 193 – Interest on securities Current threshold: Nil Proposed threshold: INR 10,000 

• Section 194 – Dividend for an individual shareholder Current threshold: INR 5,000 Proposed threshold: INR 10,000 

• Section 194A - Interest (other than on securities) Senior citizen: Current threshold: INR 50,000 Proposed threshold: INR 100,000 Others (payer is bank, cooperative society, or post office): Current threshold: INR 40,000 Proposed threshold: INR 50,000 Other cases: Current threshold: INR 5,000 Proposed threshold: INR 10,000 

• Section 194B - Winnings from lottery, crossword puzzles, etc. Current threshold: Aggregate exceeding INR 10,000 in a year Proposed threshold: INR 10,000 for a single transaction 

• Section 194BB - Winnings from horse races Current threshold: Aggregate exceeding INR 10,000 in a year Proposed threshold: INR 10,000 for a single transaction 

• Section 194D – Insurance Commission Current threshold: INR 15,000 Proposed threshold: INR 20,000 

• Section 194G - Income from lottery tickets (commission, prize, etc.) Current threshold: INR 15,000 Proposed threshold: INR 20,000 

• Section 194H - Commission or Brokerage Current threshold: INR 15,000 Proposed threshold: INR 20,000 

• Section 194-I - Rent Current threshold: INR 240,000 per year Proposed threshold: INR 50,000 per month (effectively INR 600,000 per year) 

• Section 194J - Fee for professional or technical services Current threshold: INR 30,000 Proposed threshold: INR 50,000 

• Section 194K - Income from units of mutual funds or specified companies/undertakings Current threshold: INR 5,000 Proposed threshold: INR 10,000 

• Section 194LA - Income from enhanced compensation Current threshold: INR 250,000 Proposed threshold: INR 500,000 

TDS Rate Reduction for Section 194LBC (Securitization Trusts) 

Current TDS rates: For individuals and HUFs: 25% For other persons: 30% 

Proposed TDS rates: For both individuals/HUFs and other persons: 10% 

This reduction is based on the growing popularity and regulation of securitization investments. Effective from FY 2025-26 onwards. 

Simplification of TCS Provisions (Section 206C): The Finance Bill introduces the following amendments to Section 206C related to the collection of tax at source (TCS), aimed at providing clarity and ease of compliance: 

Remittance under LRS for education financed by a loan from a financial institution: Earlier 0.5% (after INR 700,000), Proposed rate: Nil 

Remittance under LRS and overseas tour program package under section 206C(1G): Earlier threshold: INR 700,000, Proposed Revised Threshold: INR 1,000,000 

TCS and TDS on Same Transactions: The Finance Bill proposes to address the issue of duplicate tax collection under Sections 194Q and 206C(1H) of the Income Tax Act. Currently, both sections require tax collection on the same transaction when the value exceeds INR 5,000,000, resulting in both TDS (0.1%) and TCS (0.1%) being applicable. Section 206C(1H) requires sellers to collect TCS at 0.1% on the sale of goods exceeding INR 5,000,000. Section 194Q mandates buyers to deduct TDS at 0.1% on payments to sellers exceeding INR 5,000,000. While Section 206C(1H) exempts TCS if TDS is deducted under another provision, there are compliance challenges due to difficulties in confirming whether TDS has been deducted. To simplify this process, the Finance Bill proposes removing sub-section (1H) of Section 206C, thereby eliminating the TCS requirement for sales of specified goods when TDS is already deducted under Section 194Q. This change aims to reduce taxpayer burden and improve compliance. Effective from FY 2025-26 onwards.

Removal of higher TDS/TCS for non-filers of return of income: The Finance Bill proposes the removal of Sections 206AB and 206CCA of the Income Tax Act, which currently impose higher TDS (Tax Deducted at Source) and TCS (Tax Collected at Source) rates on non-filers of income tax returns. Section 206AB mandates higher TDS for individuals or entities that haven't filed their income tax returns. Section 206CCA mandates higher TCS for non-filers as well. The issue with these provisions is that deductors and collectors face difficulty verifying whether the deductee or collectee has filed their returns, leading to higher rates of TDS/TCS and causing unnecessary capital blockage and compliance burden. However, the higher TDS/TCS rates will still apply if the deductee or collectee has an invalid or no PAN. This proposed amendment will come into effect from FY 2025-26 onwards, streamlining the process and reducing unnecessary compliance challenges.

TAX INCENTIVES FOR IFSC (International Financial Services Centre)

• Extension of Sunset Clause – The Finance Bill proposes to extend the sunset date for commencing operations or relocating funds to IFSC to March 31, 2030, allowing continued tax concessions. 

• Exemption on Life Insurance Policies – Section 10(10D) of the Income Tax Act exempts sums received under life insurance policies, including those issued by IFSC Insurance Offices. However, the exemption does not apply if annual premiums exceed INR 2,50,000 for unit-linked policies and INR 5,00,000 for other life insurance policies.

• Tax Exemptions for IFSC Insurance Offices Life insurance proceeds from IFSC insurers will now be exempt from monetary limits on premium payments, ensuring parity with other foreign jurisdictions. However, the premium should not exceed 10% of the sum assured in any year. 

• Ship Leasing Units in IFSC Capital gains and dividend exemptions available for aircraft leasing units in IFSC will now be extended to ship leasing units as well. 

• Rationalization of Dividend Definition for Treasury Centres Deemed dividend provisions under Section 2(22) will not apply to loans between group entities in IFSC treasury centres, provided the parent entity is listed outside India. 

• Simplified Regime for Fund Managers in IFSC Relaxation of residency conditions for eligible funds under Section 9A by allowing participation calculations twice a year (April 1 & October 1) with a four-month rectification window. Other Section 9A conditions can be modified for funds managed from IFSC before March 31, 2030. 

• Retail Schemes & ETFs in Relocation Regime Tax-neutral relocation benefits extended to retail schemes and ETFs regulated under IFSCA Fund Management Regulations. 

• Tax Exemption for Derivative Income of Non-Residents Exemption on derivative transactions for non-residents expanded to include trades with FPIs operating in IFSC. Effective from FY 2025-26.

OTHER MEASURES

Rationalisation of taxation of Business Trust: The Finance Bill proposes an important amendment to rectify the omission of Section 112A for business trusts under the IT Act. Current Status: Business trusts (InvITs and ReITs) enjoy pass-through status for interest, dividend, and rental income, which is exempt from tax in the hands of the trust and taxed in the unit holder’s hands, unless specifically exempted. Any other income, including capital gains, is subject to tax at the maximum marginal rate. However, capital gains falling under Sections 111A and 112A are taxed at special rates rather than the maximum marginal rate. Proposed Amendment: To plug the gap, the Finance Bill proposes that capital gains from business trusts, which fall under Section 112A, will be taxed at the special rates specified in the section, aligning with the taxation of long-term capital gains from equity shares and equity-oriented funds. Effective from FY 2025-26.

Incentives for Sovereign Wealth Funds and Pension Funds:  The Finance Bill proposes to extend and enhance tax exemptions for Sovereign Wealth Funds (SWFs) and Pension Funds, with a view to further incentivizing investment in India’s infrastructure sector. Current Provisions: Section 10(23FE) of the IT Act currently provides tax exemptions for income in the form of dividends, interest, and long-term capital gains from investments made in specified infrastructure businesses. This incentive was applicable for investments made until March 31, 2025, and has led to a significant influx of capital into India. Proposed Amendments: Extension of Sunset Date: The Finance Bill proposes to extend the sunset date for investments made by these funds to March 31, 2030, providing a longer period for global investors to contribute to India’s infrastructure development. Long-Term Capital Gains on Unlisted Debt Securities: Due to an amendment in Section 50AA under the Finance Act, 2024, long-term capital gains from unlisted debt securities were reclassified as short-term capital gains, thereby no longer being exempt for sovereign wealth funds and pension funds. The Finance Bill proposes to amend Section 10(23FE) to provide exemption for long-term capital gains from unlisted debt securities, irrespective of the reclassification under Section 50AA. These amendments are expected to further incentivize SWFs and pension funds to continue investing in India, particularly in unlisted debt securities. Effective from April 1, 2025.

The Direct Tax Code (DTC) 2025: India's New Direct Tax System

The Direct Tax Code bill started with its first draft in 2009, followed by its Revised Discussion Paper (RDP) introduction in the Lok Sabha, also known as the House of the People or the lower house of India's bicameral Parliament in 2010. Since then, the government has formed a Standing Committee of Finance (SCF) to discuss it with various stakeholders. The final version of the refined code will be presented within the next six months, most likely in the Union Budget 2025. If the bill is passed, changes will take effect from the financial year 2025-26, encouraging smoother tax compliance and simplifying the experience for taxpayers. Below are some key takeaways from the DTC bill.

The Direct Tax Code 2025 will replace the Income Tax Act of 1961 and the Wealth Tax Act of 1957, bringing India streamlined and modernised tax systems that clarify regulations, widen income tax brackets, reduce deductions, and aim to increase compliance. The new tax code will consolidate all direct tax laws under a single framework, eliminate outdated exemptions and deductions to broaden the tax base, introduce a dispute mediation mechanism, and expand audit roles beyond Chartered Accountants (CAs). India’s DTC 2025 aspires to align with global standards, enhance equity in tax obligations, and foster a future-ready framework adaptable to economic and technological shifts. While this overhaul promises a more transparent and taxpayer-friendly system, its success will hinge on efficient implementation and adaptability to unforeseen economic impacts.

Key amendments in the Direct Tax Code Bill also referred as DTC 2.0 include:

• Personal tax: The bill widens income tax slabs for individuals. Income between Rs 2 to Rs 5 lakh will be taxed at 10%, between Rs 5 and Rs 10 lakh at 20%, and over Rs 10 lakh at 30%. A key aim of the DTC is to simplify compliance and foster a broader taxpayer base, raising it from 1% to 7.5% of India’s population by reducing deductions and tax breaks. Those earning up to Rs 55 lakh may get major tax relief. Tax rate for income above Rs 10 crores shall be 35%, instead of 30% + surcharge at 15%.

• Unified tax rates for companies: DTC introduces a unified tax rate for domestic and foreign companies, taxing both at 30% of business income, simplifying compliance and fostering foreign investment. Foreign entities will incur an additional branch profits tax of 15%, while non-profits are set at 15%. Notably, the DTC eliminates many exemptions and deductions currently allowed for companies but retains most deductions available to individuals. A slew of incentives for start-ups.

• Capital Gains: Capital gains earlier taxable at a special rate under the DTC will form a part of normal income. DTC removes the distinction between short-term and long-term capital gains for all assets except securities listed on stock exchanges.

• Wealth Tax: The wealth tax exemption will also see a hike from ₹15 lakh to ₹1 crore.

• Nomenclature change: Another substantial change is the removal of outdated terminology—“Assessment Year” and “Previous Year”—replaced solely by “Financial Year.” Also, in the draft code, "Income from Salary“ has been renamed to "Employment Income“, and "Income from Other Sources” is now called "Income from Residuary Sources”.

• GAAR, the double-edged sword if misused: GAAR empowers tax officials to counter tax evasion but risks misuse due to broad authority. Guidelines limit GAAR to large transactions with panel approval, per the Shome Committee’s recommendations for transparency and limited retroactive use. DTC introduces General Anti Avoidance Rules, which allow tax authorities to classify any arrangement into which one entered for tax avoidance.

• Simplified residence rule: Residential status for taxpayers will now be classified as either residents or non-residents, removing the RNOR (Resident but Not Ordinarily Resident) category.

• Simplified and unified structure: The DTC 2025 arranges its 319 sections and 22 schedules in a straightforward, less fragmented format than the over 700 in the Income Tax Act. DTC to remove all clauses and sub-clauses. By refining and consolidating the structure, the DTC 2025 minimises the need for cross-referencing multiple sections, making the tax filing process more straightforward for individuals, businesses, and tax professionals alike.

• Expansion of audit roles: Compliance is proposed to be bolstered with expanded roles in tax audits now accessible to Company Secretaries (CS) and Cost and Management Accountants (CMA), a function previously restricted to Chartered Accountants (CAs).

• Tax deduction on most income: Additionally, digitalization features prominently in the DTC, enhancing efficiency and transparency. Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) will apply to almost all types of income, promoting more regular tax payments. The TDS rate for many payments will be reduced from 5% to 2%. For e-commerce operators, the TDS rate will be significantly lowered from 1% to 0.1%, providing relief to taxpayers and simplifying compliance for e-commerce businesses.

• Assessments and Dispute Resolution: Assessing units to replace assessment officers. A new dispute mediation system and improved reassessment rules aim to decrease tax-related litigation and resolve disputes efficiently. Mechanism of mediation between taxpayers and CBDT.

• Taxation on dividends: DTC proposes dividends to be taxed at 15% without Dividend Distribution Tax (DDT).

INDIRECT TAX PROPOSALS

From an indirect tax perspective, most of the proposed GST amendments align with GST Council approvals. The key proposals include a retrospective change to strengthen legal provisions by explicitly changing ‘plant or machinery’ to ‘plant and machinery’ and predeposit requirements for appeals related to penalty cases. It also seems that the optional Invoice Management System may soon become mandatory.

The legislative enablement of the Invoice Management System (IMS) is made through Section 38(1) and Section 38(2) of the CGST Act by replacing the term 'auto-generated statement' with 'statement of input tax credit’.

No adjustment of outward liability in case of credit not unless recipient reverses ITC: The Finance Bill proposes an amendment to Section 34(2) of the CGST Act, requiring suppliers to ensure that registered recipients reverse the ITC corresponding to a credit note before the supplier can claim a reduction in tax liability. This aims to prevent double tax benefits and ensures both parties bear tax adjustments proportionately. The amendment introduces additional compliance obligations for suppliers and is expected to be applicable from the date to be notified.

Availability of ITC by Input Service Distributor for inter-state supplies under reverse charge mechanism: The Finance Bill proposes a change to the CGST Act allowing Input Service Distributors to distribute ITC on IGST payments for inter-state supplies under the reverse charge mechanism. This aims to resolve ambiguities and ease business operations, effective from April 1, 2025.

Omission of the provisions dealing with time of supply for vouchers: The Finance Bill proposes the omission of Sections 12(4) and 13(4) of the CGST Act, clarifying that vouchers are neither goods nor services. This aims to eliminate ambiguity around their taxability, with the change effective from a date to be notified. Section 12(4) and Section 13(4) of the CGST Act, which provides for the time of supply of vouchers is omitted. Consequently, sale/distribution of vouchers under P2P model would no longer be subject to GST.

Substitution of “plant or machinery” in place of “plant and machinery” to restrict ITC for building: The Finance Bill proposes amending Section 17(5)(d) of the CGST Act to replace "plant or machinery" with "plant and machinery," effectively overturning the Supreme Court’s decision in Safari Retreats. This retrospective change, effective from July 1, 2017, restricts ITC on the construction of buildings, impacting sectors like ports, jetties, and infrastructure.

Reduction in mandatory pre-deposit amount to file an appeal: The Finance Bill proposes a reduction in the mandatory pre-deposit amount for filing an appeal under Sections 107 and 112 of the CGST Act. The pre-deposit requirement will now be reduced from 25% to 10% for cases involving only penalty demands, without any tax demand. This change aims to provide relief to taxpayers by reducing the financial burden of paying substantial penalties as pre-deposit, thereby improving working capital management.

Establishment of a unique identification marking system (UIMS): The Finance Bill introduces a mandatory track and trace mechanism for certain goods, requiring a unique, secure, and non-removable identification marking, such as a digital stamp or mark. New Section 148A inserted to provide track and trace mechanism for certain specified goods. This system will allow the GST department to monitor goods' movement from origin to end-use. It also mandates specified persons to provide detailed information on their production facilities and operational capacity. New Section 122B inserted to provide for levy of penalty. Failure to comply will incur a penalty of INR 100,000 or 10% of the tax payable, whichever is higher. This amendment aims to enhance GST compliance, particularly in high-risk sectors like tobacco, electronics, and luxury goods.

Disclaimer: This article is published by SSC. The report booklet has been updated until February 1, 2025. It is not intended to be used as the basis for trading in the shares of any company or undertaking any other complex or significant financial transactions without consulting appropriate professional advisers. No part of this report may be copied or redistributed in any form without the prior written consent of SSC.

India's Economic Landscape

In FY2024, India’s economy soared with an impressive growth rate of 8.2%, affirming its position as the fastest-growing large economy worldwide. This expansion was primarily driven by substantial government investment, evidenced by a 27% rise in capital expenditure, complemented by low inflation rates. However, challenges linger in the form of weak consumer demand and private capital expenditure, highlighting a sluggish recovery in consumption. Key sectors like mining, manufacturing, and construction benefitted from increased infrastructure spending, though erratic monsoon patterns dampened agricultural productivity and consumer sentiment. Despite retail inflation remaining within the Reserve Bank of India's target, fluctuating food prices and rising Wholesale Price Index (WPI) – peaking at a 16-month high in June – present ongoing concerns. The services sector, meanwhile, grappled with a slowdown in exports due to weaker global demand. Looking forward, the Economic Survey for FY2025 anticipates GDP growth of 6.5% to 7%, buoyed by easing global inflation and strengthening domestic factors, yet risks such as geopolitical tensions and potential downturns in the global IT sector loom large.

On the fiscal front, the Indian government is pursuing a dual strategy of fiscal prudence and growth stimulation. The fiscal deficit target has been set at 4.9%, down from 5.1%, with a goal to drop below 4.5% by FY2026. Tax collections are projected to rise by 11.2%, with significant contributions from non-tax revenues, including a record dividend from the Reserve Bank. The budget also proposes reforms in both indirect and direct taxes, aiming to simplify the GST and review the Income Tax Act, alongside incentives to attract foreign investment. Overall, the FY2024-25 budget reflects a pragmatic approach, balancing the need for fiscal consolidation with the impetus for growth, thereby laying the groundwork for a resilient Indian economy on its path to becoming a ‘Viksit Bharat.’

Key Regulatory and Tax Proposals

• Tax Rates

• Income Tax: The recent tax proposals maintain stability for most sectors, with income tax rates for domestic companies, cooperative societies, and firms remaining unchanged. Notably, the tax rate for foreign companies on non-specified income, such as royalties and technical service fees, sees a reduction from 40% to 35%, while surcharges and cess remain intact. For individuals, those opting for the old tax regime will see no changes in tax rates. However, enhancements are proposed for the New Personal Tax Regime (NPTR). The standard deduction for salaried employees will increase from INR 50,000 to INR 75,000, and the deduction for family pensions will rise from INR 15,000 to INR 25,000. Additionally, the deduction for contributions to the National Pension Scheme (NPS) will extend to 14% for non-government employees choosing the NPTR. 

• Customs: On the customs front, significant adjustments in the Basic Customs Duty (BCD) are scheduled for July 2024, with increases for specific plastic products and laboratory chemicals, while maintaining the BCD for garden umbrellas. Starting in October 2024, further changes will affect BCD for machinery used in aviation and shipping, as well as certain electronic goods. Additionally, exemptions from the social welfare surcharge will be expanded to cover various minerals, chemicals, and metals. 

Overall, the tax landscape reflects a cautious approach, prioritizing stability while introducing targeted adjustments aimed at promoting compliance and incentivizing savings.

• Widening the Tax Base

• Strategic Revisions Ahead: The latest tax reforms signal a determined effort to widen the tax base while tightening regulations. From 1 April 2024, the exemption from capital gains tax on the transfer of capital assets as gifts will be restricted to individuals and Hindu undivided families, streamlining the tax framework. 

• Buyback of shares: Starting 1 October 2024, significant changes to buyback tax provisions will ensure that income from buybacks is treated as dividend income for shareholders, subject to taxation without deductions. 

• Ten per cent tax deduction at source (TDS) will be mandated on partner payments exceeding INR 20,000 within a year effective from 01 April 2025, reinforcing compliance among partnership firms. 

• The scope of tax collection at source (TCS) is being broadened: To encompass additional goods, with stringent penalties introduced for inaccuracies in financial transaction statements, set at INR 50,000. The interest rate on delayed TCS payments will rise from 1% to 1.5% per month, aligning it with TDS provisions. 

• Foreign Residents: Moreover, taxes withheld abroad will now contribute to the taxpayer's total income calculation in India, and non-resident liaison offices will face daily penalties for late filings, escalating to INR 100,000 for prolonged delays. Transfer pricing assessments will also be strengthened, granting authorities expanded powers to address unreported domestic transactions. 

• Basic Customs Duty: Finally, as of 1 October 2024, exemptions on Basic Customs Duty (BCD) will be withdrawn for certain renewable energy components, including catalysts for wind generators and batteries for electric vehicles, reflecting a shift towards fiscal accountability in environmentally sensitive sectors. These revisions illustrate the government’s commitment to enhancing tax compliance while simultaneously expanding its revenue base in an evolving economic landscape.

• Tax Certainty

  • Income Tax 

• Transfer Pricing: Expansion of safe harbour rules aims to reduce litigation related to transfer pricing. 

• Income Classification for House Property: Clarifying previous ambiguities, income from letting out of a ‘residential house’ is to be taxed under the head ‘income from house property’ and not as ‘profit and gains from business or profession’.

• Disallowance of Dispute Settlement Expenditure: Expenditures incurred to settle disputes/ proceedings for law contraventions including VsV, 2024 will be disallowed for tax deductions.

• Limitation Period for TDS Defaults: The limitation period for defaults in TDS obligations has been reduced to six years, applicable to non-residents as well.

• Presumptive Income for Cruise Ships: Non-residents operating cruise ships will be included under presumptive income schemes, allowing 20% of receipts to be treated as income. 

• Clarity on TDS u/s 194J: A proposed amendment aims to resolve conflicts between TDS provisions for 'professional fees' u/s 194J and 'contractual services' u/s 194C.

• Option to withdraw applications moved before the Board of Advance Rulings: The taxpayers are to be provided an option on or before 31 October 2024 to withdraw the pending advance ruling application transferred to the Board of Advance Ruling (BAR), in cases where the BAR has not passed an order for acceptance or rejection of the application.

• Extended TDS Certificates: The scope of a lower or nil TDS certificate is extended to include the provisions of section 194Q of the Act related to the purchase of goods.

• Goods & Services Tax (GST)

• Time of Supply: The date of issuance of an invoice by the service recipient will define the time of supply for services received from unregistered suppliers under reverse charge. 

• Registered Suppliers: Suppliers registered solely for TDS will not be considered registered persons for invoice issuance under reverse charge. 

• Refund Restrictions: Refunds for zero-rated supplies will be restricted if the goods are subject to export duty. 

• Penal Liability: Penal liability for failure to collect TCS will be limited to e-commerce operators starting 1 October 2023. 

• Transitional Credits: Input service distributors can claim transitional credit for services invoiced before 1 July 2017. 

• Anti-profiteering Amendments: The government may set a deadline for anti-profiteering applications, with the GST Appellate Tribunal designated to handle such cases. 

• Coinsurance and Reinsurance: No GST will apply to lead insurers apportioning co-insurance premiums; reinsurance services will be subject to specific conditions. 

• Revoked Registration Credits: Tax credits will be allowed for invoices issued during the period between cancellation and revocation of registration. 

• General Trade Practices: New provisions empower the government to regularise instances of non-levy or short levy of GST due to common trade practices.

• Rationalisation and Simplification Proposals

  • Income Tax

    • SGTC tax rate increased: The tax rate on short-term capital gains on the transfer of listed securities that are subject to securities transaction tax (e.g., equity shares, units of equity-oriented mutual funds and units of business trust) increased from 15% to 20% w.e.f. 23 July 2024. 

    • New LTCG Regime - Indexation benefit removed on the long-term gains on capital assets purchased after 23 Jul 2024: This 'new LTCG regime' replaces the prior indexed cost method, traditionally taxed at 20%, with an option allowing taxpayers to continue under the old method for transfers completed up to July 22, 2024. Additionally, the holding period for assets to be classified as "long-term" was streamlined to 24 months for assets other than listed securities. Under the new system, a flat LTCG tax rate of 12.5% was imposed on transfers undertaken on or after 23 July 2024 on all assets, excluding specific securities held by foreign portfolio investors. On widespread public representation, CBDT subsequently notified that taxpayers can choose between the flat rate of 12.5% without indexation (new regime) and the indexed cost method taxed at 20% (old regime) for Long-Term Capital Gains (LTCG) transactions completed up to July 22, 2024. The Finance Act, of 2024 prescribed that in cases where the transfer of long-term capital assets being land or building which was acquired before July 23, 2024, and where the income tax under the new regime exceeds the income tax computed before the enactment of the new regime, such excess shall be ignored. To be sure, despite the Finance Act's enactment on August 6, 2024, these changes remain retroactive to July 23, 2024, reinforcing the cut-off for all LTCG transfers. Moreover, roll-over reliefs remain accessible, allowing taxpayers to mitigate LTCG liabilities through reinvestment options under various sections.

    • The rate of securities transaction tax (STT) increased on the following:
      – Sale of an option in securities: from 0.0625% to 0.1% of the option premium
      – Sale of a future in securities: from 0.0125% to 0.02% of the price at which such futures are traded 

    • The exemption limit on long-term capital gains on the transfer of listed shares, units of equity-oriented funds and units of business trust (subject to conditions) enhanced from INR 1,00,000 to INR 1,25,000.

    • The period of holding to determine the long-term and short-term capital assets was simplified: – All capital assets are to be treated as long-term capital assets if they are held for more than 24 months, instead of 36 months. – All listed securities, including units of business trust, are to be considered as long-term capital assets if they are held for more than 12 months. Income on the transfer, redemption or maturity of ‘unlisted debentures’ or ‘unlisted bonds’ on or after 23 July 2024 is to be deemed as ‘short-term capital gains’.

    • Units of the following types of ‘specified mutual fund’ are to be characterised as short-term capital assets: a. Mutual funds that invest more than 65% of their total proceeds in debt and money market instruments; b. Funds that invest 65% or more of their total proceeds in units of a fund referred to in (a) above. 

    • Tax exemption on the specified income of the Core Settlement Guarantee Fund is extended to such funds set up by recognised clearing corporations in the IFSC. Exemption for investments (as unexplained cash credits) by venture capital funds (VCFs) registered with the Securities and Exchange Board of India is now extended to VCFs regulated by the IFSCA. Thin capitalisation provisions are not to apply to finance companies in the IFSC.

    • Relaxation of TDS on Salary: Proposed adjustments to TDS provisions on salaries will allow for credit against TCS, streamlining compliance for taxpayers. 

    • Clarification on Unlisted Shares: A retrospective clarification on the cost of acquisition for unlisted equity shares transferred during an IPO will apply from 1 April 2017, aiding taxpayers in asset valuations. 

    • Abolition of Equalisation Levy: The 2% equalisation levy on e-commerce services will be abolished starting 1 August 2024, potentially reducing compliance burdens for digital businesses. 

    • Increase in Partner Remuneration Deductions: The deduction limits for remuneration to working partners in partnership firms will be enhanced, offering greater tax relief: For the first INR 600,000 of book profits, a deduction of INR 300,000 or 90% of profits, whichever is higher. For remaining profits, the deduction rate will be 60%. 

    • Reintroduction of Block Assessment: Block assessment provisions for search cases, previously abolished, will be reinstated for searches initiated on or after 1 September 2024, aiming to improve assessment efficiency. 

    • Rationalization of Reassessment Timeline: The timeline for reassessment notices will be shortened from 10 years to 5 years and 3 months, expediting the process. Correction Statement Filing: The time limit for filing correction statements has been reduced to six years from the end of the year in which the original TDS or TCS statement was due. 

    • Rationalization of TDS Rates: Significant reductions in TDS rates across various sections are proposed to take effect from 1 October 2024, enhancing clarity and potentially reducing tax liabilities for individuals and entities engaged in diverse financial activities. 

    • Income Tax Assessment: Assessments related to returns filed under CBDT orders must be completed within 12 months of the financial year's end, with the CIT(A) granted authority to remand cases for reconsideration. 

    • Customs Exemptions: The extension of Basic Customs Duty (BCD) exemptions for various sectors, including renewable energy and medical equipment, underscores a commitment to promote specific industries until 2026 and 2029. 

    • Taxation Reforms: The government plans to abolish the controversial angel tax by April 2024 and introduce a new Direct Tax Vivad Se Vishwas Scheme to expedite tax dispute resolutions. Furthermore, the exemption regime for trusts will transition to a more streamlined approach effective October 2024.

    • Capital Gains Tax: The tax on short-term capital gains for listed securities will increase from 15% to 20%, while long-term gains will now be taxed at 12.5%. The holding period for capital assets to be classified as long-term has been reduced, enhancing liquidity and encouraging investment. Investment Incentives: Reforms to encourage foreign direct investment and the establishment of a venture capital fund for the 'space economy' reflect a strategic focus on growth sectors.

• • Goods & Services Tax

    • A path towards GST 2.0: Significant amendments include the exclusion of undenatured alcohol from GST and retrospective adjustments for input tax credits, aiming to facilitate compliance and paving the way towards GST 2.0

    • The pre-deposit requirement for filing appeals before the appellate tribunal is reduced from 20% to 10% of the tax in dispute. Moreover, the maximum limit of the predeposit for filing appeals before the appellate authority level (including GST appellate tribunal) is reduced to INR 200m. Similar amendments are made in the Integrated Goods and Services Tax Act, 2017, to reduce the pre-deposit cap to INR 400m.

    • GST amnesty scheme for interest and penalty for FY 2017-2020: A special provision is introduced for the waiver of interest and penalty in respect of specified notices, orders or statements issued under section 73 of the Act, subject to payment of the full amount of tax payable within the notified timelines. The provisions are to apply for demands pertaining to the period from 1 July 2017 to 31 March 2020. The waiver of interest and penalty is subject to specified conditions and exclusions. There is to be no refund of interest or penalty already paid.

    • A specific provision is inserted to allow an authorised representative to appear on behalf of the summoned person before the proper officer.

    • GSTAT: Amendments are proposed to section 112 of the Central Goods and Services Tax Act, 2017, to empower the government to notify the date of filing an appeal before the GSTAT and provide a revised time limit for filing an appeal or application before the GSTAT. Said amendment is effective from 1 August 2024.

• • Regulatory Front

    • A series of proposed amendments aim to modernize India's trade and employment landscape, aligning with contemporary free-trade agreements and enhancing regulatory efficiency. Notable changes include replacing "certificate of origin" with "proof of origin" in customs regulations and refining warehousing provisions to clarify non-manufacturing activities.

    • Significant employment measures are introduced, including mandatory tax return filings even in the absence of deductions, and the launch of Employment Linked Incentive schemes. These will provide direct benefits to first-time employees and reimburse employers for EPFO contributions for two years.

    • To support women’s workforce participation, initiatives such as working women’s hostels and creches are to be established. The proposal also emphasizes skills development through internships in major GST-regulated companies and the upgrading of industrial training institutes.

    • Additionally, a Credit Guarantee Scheme for MSMEs (CGMSME) aims to facilitate term loans for machinery purchases without collateral, while public sector banks will enhance their credit assessment capabilities. A new credit mechanism will ensure continued bank support for stressed MSMEs, preventing their classification as non-performing accounts.

    • Investment-ready industrial parks will be developed in 100 cities, alongside digitization initiatives for land records, enhancing transparency and efficiency in property management. This comprehensive reform package signals a significant step towards fostering economic resilience and boosting productivity across sectors.

    • Black Money Act Amendment: The amendment simplifies reporting requirements for foreign assets under the Black Money Act, exempting assets valued below INR 2 million (excluding immovable property) from reporting. 

    • The Centre for Processing Accelerated Corporate Exit (C-PACE), which is currently available for companies, is now to be extended for voluntary closure of limited liability partnerships.

    • Foreign direct investment and overseas investment rules: FDI & ODI Rules are proposed to be simplified, and new provisions are to be introduced to promote opportunities to use the Indian rupee as a currency for overseas investments.

    • Indian Bankruptcy Code: An integrated technology ecosystem is to be introduced to improve outcomes as well as achieve consistency, transparency and timely processing under IBC. Existing tribunals including NCLT are to be reformed, strengthened and expanded to speed up insolvency resolution and debt recoveries.

    • The Jan Vishwas Bill 2.0 is proposed to enhance the ease of doing business in India.

Section 145 of the Income-tax Act, 1961 provides for taxation of income from other sources (like interest) in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Where to report KVP interest income which was offered to tax in the previous years' ITR (as such Income cannot be reported as a deduction u/s 57 nor can it be declared as exempt income u/s 10 of the Act)

How to Avoid Double Taxation on Kisan Vikas Patra (KVP) Interest Income?

The article provides advice to an individual who bought Kisan Vikas Patra (KVP) for Rs 20 lakhs in 2021 and has been paying income tax on the interest accrued every year. The article suggests that the individual may offer the interest income to tax on a cash basis at the time of maturity or on an accrual basis every year if they regularly adopt the mercantile system of accounting. The article also clarifies that no taxes are required to be deducted on the interest income at the time of maturity and any tax due is payable entirely as self-assessment tax/advance tax. Additionally, the article answers a question about whether a minor can open a public provident fund (PPF) account, stating that only a guardian on behalf of a minor is eligible to open a PPF account, and only one account can be opened in the name of a minor by any guardian. 

👉 In 2021, the person bought Kisan Vikas Patra (KVP) for ₹20 lakhs. 

👉 They have been paying income tax on the interest accrued on this every year and including it in their income tax returns (ITRs). 

👉 Since there’s no provision of tax deducted at source (TDS) on the interest earned by KVP, its consolidated interest will reflect in their 26AS and annual information statement. 

👉 To avoid double taxation at the time of redeeming the KVP, they should offer the interest income earned from KVP on mercantile basis. 

👉 In case of any inquiry about the mismatch of the interest income appearing in the AIS in the year of maturity vis-à-vis the interest income offered to tax in that year, the same may be explained on the basis of a reconciliation of the accrued amount offered to tax in past years’ tax return and necessary documentary evidence. 

👉 As per the current provisions of section 194A of the Act, on maturity of the KVP, no taxes are required to be deducted on the interest income.

Source:: https://economictimes.indiatimes.com/wealth/tax/are-you-reporting-all-your-interest-income/articleshow/46483299.cms?from=mdr

I bought Kisan Vikas Patra (KVP)  worth ₹20 lakh a few years ago. Since its interest is payable on maturity and there is no TDS deduction every year or on maturity. I have been mentioning accrued interest every year in my ITR and paying tax on it, but at the time of maturity when total interest will be shown in my AIS and/or in 26AS, how will I mention that I have already paid the tax on KVP interest in the previous years?

It is assumed that you are not required to maintain and get the books of accounts audited under the provisions of the Income-tax Act, 1961. Section 145 of the act provides for taxation of income from other sources (like interest) in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Hence, if cash basis is regularly adopted, interest from KVP may be offered to tax in the year of its maturity. If mercantile basis is regularly adopted, interest should be offered to tax every year on an accrual basis.

Since you have opted to offer tax on mercantile basis, in case of any inquiry by the tax department in view of the mismatch of the interest income appearing in the AIS in the year of maturity and the interest income offered to tax, the same may be explained before the tax officer on the basis of reconciliation of the accrued amount offered to tax in past years’ tax return and other documentary evidence.

It may be separately noted that as per the current provisions of Section 194A of the Act, on maturity of the KVP, no taxes are required to be deducted on the interest income. Hence, tax due (if any) shall be required to be paid by way of self-assessment tax / advance tax (as applicable).

Source: https://www.livemint.com/money/personal-finance/how-is-interest-income-from-kvps-taxed-11667751229434.html

How is KVP taxed at the time of redemption?

A reader asks how to avoid double taxation on the interest earned from a Kisan Vikas Patra (KVP) investment. KPMG India advises on tax implications and suggests offering the interest to tax on either a cash or mercantile system of accounting.

In 2021, I bought Kisan Vikas Patra (KVP) for ₹20 lakh. I have been paying income tax on the interest accrued on this every year and also include it in my income tax returns (ITRs) . Since there’s no provision of tax deducted at source (TDS) on the interest earned by KVP, its consolidated interest will reflect in my 26AS and annual information statement. What should I do to avoid double taxation at the time of redeeming the KVP? —Name withheld on request 

It is assumed that you are not required to maintain and get the books of accounts audited under the provisions of the Income-tax Act, 1961. Section 145 of the Act provides for taxation of income from other sources (like interest) in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Hence, if cash basis is regularly adopted, interest from Kisan Vikas Patra (KVP) may be offered to tax in the year of its maturity. If mercantile basis is regularly adopted, the interest should be offered to tax every year on an accrual basis.

In the instant case, you have opted to offer to tax the interest income earned from KVP on mercantile basis, which is presumably the regular system of accounting followed by you, in accordance with the above provisions. In case of any inquiry about the mismatch of the interest income appearing in the AIS in the year of maturity vis-à-vis the interest income offered to tax in that year, the same may be explained on the basis of a reconciliation of the accrued amount offered to tax in past years’ tax return and necessary documentary evidence. 

It may be separately noted that as per the current provisions of section 194A of the Act, on maturity of the KVP, no taxes are required to be deducted on the interest income. Hence, tax due (if any) is entirely payable as self-assessment tax / advance tax (as applicable).

Parizad Sirwalla Updated 9 Jun 2023, 05:35 PM IST

https://www.livemint.com/money/personal-finance/avoiding-double-taxation-on-kisan-vikas-patra-interest-income-expert-advice-for-2021-investments-and-income-tax-returns-11684691168297.html

Case Law 1 :: Sureshchandra M Shah vs. ACIT

Decision of the Gujarat High Court in the case of Sureshchandra M Shah vs. Assistant Commissioner of Income Tax (TAXAP/873/2013), dated 27th January 2014

The Gujarat High Court judgment in the case of Sureshchandra M Shah vs. Assistant Commissioner of Income Tax (TAXAP/873/2013), dated 27th January 2014, deals with the taxation of interest accrued on Kisan Vikas Patras (KVPs).

Here’s a summary of the key points from the judgment:

1. Background: The appellant, Sureshchandra M Shah, challenged the Income Tax Appellate Tribunal's (Tribunal) decision, which upheld the Assessing Officer's (AO) addition of accrued interest on KVPs to the appellant’s total income for the Assessment Year 2007-08. The appellant argued that the interest on KVPs should not be taxed annually but only at maturity, with the benefit of indexation.

2. Issue: The core issue was whether the interest accrued on KVPs should be taxed on an accrual basis annually, or only on maturity.

3. Tribunal's Findings: The Tribunal had found that:

   • KVPs are not capital assets but are treated as deposits with fixed interest rates.

   • Interest on KVPs accrues annually and should be accounted for in the year it accrues.

   • The appellant’s contention that KVPs should be treated as capital assets and taxed only on maturity was not accepted.

4. High Court’s Decision:

   • The High Court concurred with the Tribunal’s findings and dismissed the appeal.

   • It was noted that KVPs are issued with fixed interest rates and terms, which necessitate the accrual of interest on an annual basis under the mercantile system of accounting.

   • The High Court agreed that the Circular No. 687 from 1994, which directs the accrual basis for interest on KVPs, was correctly applied by the authorities.

5. Conclusion: The High Court found no error in the Tribunal's decision or in the application of the Circular. The interest on KVPs must be taxed on an accrual basis, not only at maturity. Therefore, the appeal was dismissed.

This ruling emphasizes the treatment of KVPs for tax purposes, affirming that accrued interest should be included in income for the year it accrues, even if the actual maturity of the KVP is in a future period.

Sources :: https://www.tenettaxlegal.com/wp-content/uploads/2014/07/Tenet-Tax-Daily-July-15-2014.pdf and https://indiankanoon.org/doc/48553940/

Tax Treatments

Is KVP taxable on maturity? Yes. KVP is taxable upon maturity. There is no tax benefit under this scheme. The interests accrued are taxable under ‘income from other sources’, paid every year.

Investment in KVP is not eligible for deduction under the 80C, and the Interest income are completely taxable. Withdrawals made after the maturity period are not subject to Tax Deducted at Source (TDS). Maturity proceeds are also not taxable since it is essential repayment of the principal and Interest (which is already taxed at the time of accrual every year).

No income tax benefit is available under the Kisan Vikas Patra scheme. Interest income is taxable, however, the deposits are exempt from Tax Deduction at Source (TDS) at the time of withdrawal. KVP deposits are exempt from Wealth tax. Income tax laws do not allow individuals below 60 years any deduction for interest earned from KVP. 

But can a senior citizen claim deduction on interest earned on KVP under section 80TTB of the Income Tax Act, 1961? Section 80TTB allows a senior citizen to claim deduction on the interest earned from deposits held with bank, post office and co-operative societies. This includes interest earned from savings bank accounts, bank fixed deposits, Senior Citizens Savings Scheme, post office time deposits, post office monthly income scheme, and so on. A maximum deduction of Rs 50,000 can be claimed under Section 80TTB on all the interests earned from deposits. By nature KVP is more likely falling more in the category of bonds than deposits. This is the reason why KVP was excluded from the 80TTB deduction by the government. Hence, a senior citizen cannot claim deduction under Section 80TTB on the interest earned on KVP.

Bare Act Source :: https://www.nsiindia.gov.in/(S(h3qtrl55htdvgh55wuasoa45))/InternalPage.aspx?Id_Pk=88