Significant Direct Tax Proposals in the Finance (No.2) Bill, 2024

The Finance (No.2) Bill, 2024 introduces pivotal direct tax amendments affecting capital gains, share buybacks, reassessments, and search assessments. Grouped under key themes of tax simplification, rationalization, anti-avoidance, and improved administration, these proposals bring structural modifications to the Income-tax Act, 1961.

1. Key Key Metrics & Operational Timelines

12.5%

Revised LTCG tax rate (without indexation) effective July 23, 2024

12 / 24 Mo

Harmonized holding periods for listed (12 mo) & non-listed (24 mo) assets

5 Years

Reduced maximum time limit to reopen tax reassessments (down from 10 yrs)

60%

Flat tax rate applicable on undisclosed income in reintroduced Block Assessments

2. Capital Gains Tax Restructuring

Removal of Indexation & Tax Rate Reduction (Sections 48 & 112)

Effective July 23, 2024, the scheme of taxation under Section 112 is undergoing a major shift. The tax rate for long-term capital gains (LTCG) is reduced from 20% to 12.5%, while indexation benefits available under the second proviso to Section 48 for real estate, gold, and unlisted assets are eliminated.

Impact Analysis:
Taxpayers whose assets appreciate more than 8 times over their 2001 FMV or cost of acquisition stand to benefit from the flat 12.5% rate. However, taxpayers with moderate appreciation will experience higher tax burdens due to the loss of inflation indexation. Grandfathering provisions or an option to pay 20% with indexation have been recommended to ensure fairness.

Holding Period Rationalization (Section 2(42A))

The criteria for determining short-term capital assets have been simplified to two broad categories:

Listed Securities: Holding period of not more than 12 months.
All Other Assets: Holding period of not more than 24 months.

Consequential & Clarificatory Needs

Slump Sale (Section 50B): Requires a consequential amendment to reduce the holding period threshold for undertakings from 36 months to 24 months.
IPO Offer for Sale (Section 55(2)(ac)): Needs clarification regarding whether unlisted equity shares sold via an Offer for Sale (OFS) in an IPO require a 12-month or 24-month holding period for LTCG qualification.

3. Corporate & Shareholder Taxation

Share Buyback Distribution Taxed as Dividend (Section 2(22)(f))

W.e.f. October 1, 2024, amounts received by shareholders upon share buybacks will be deemed as dividend income and taxed at applicable marginal rates (up to 30%). The original cost of acquisition of buyback shares will be treated as a capital loss, which cannot be offset against the deemed dividend income.

Abolition of Angel Tax (Section 56(2)(viib))

The angel tax provision—which taxed premium investments exceeding fair market value in closely held companies—has been completely abolished for resident companies, offering major relief to domestic startups and investors.

Restriction on Gift Transfers (Section 47(iii))

W.e.f. Assessment Year 2025-26, tax-exempt capital asset transfers via gifts or irrevocable trusts are strictly restricted to Individuals and HUFs. Corporate entities and firms can no longer claim tax exemption under Section 47(iii) for gift transfers, impacting CSR-related donations.

4. Income Classification: Residential Letting Out

Under proposed Explanation 3 to Section 28, effective A.Y. 2025-26, any income derived from letting out a residential house or part thereof by the owner will be mandatory taxed under "Income from house property", rather than as business income. This overrides earlier Supreme Court rulings (*Chennai Properties*, *Rayala Corporation*) for residential properties, though clarification remains pending for commercial property letting.

5. Tax Administration, Reassessments & Search Cases

Rationalization of Reassessment Timelines (Sections 148, 149 & 151)

Effective September 1, 2024, the outer time limit to issue reassessment notices under Section 149 is reduced from 10 years to 5 years from the end of the relevant assessment year (3 years in normal cases; 5 years for income escaping assessment exceeding ₹50 lakh).

Reintroduction of Block Assessment for Search Cases

Search Assessment Framework (Effective Sept 1, 2024):

Replaces individual yearly assessments with a single consolidated assessment for a 6-year block period.
Undisclosed block income will be taxed at a flat rate of 60% under Section 113.
Penalty of 50% of tax payable applies unless undisclosed income is declared voluntarily in the search return.
Assessment must be completed within 12 months from the execution of search authorizations.

Direct Tax Vivad Se Vishwas Scheme, 2024 (VSV 2.0)

A new amnesty scheme has been introduced to expedite the resolution of pending tax appeals at the first appellate level by allowing taxpayers to settle disputed tax liabilities with partial waivers of interest and penalties.