Income Tax Updates: 7 Key Changes in TDS Rates, STT, and Aadhaar Rules Effective October 1

From October 1, several significant amendments in income tax regulation are to come into effect. The changes were first mooted by Finance Minister Nirmala Sitharaman in the Union Budget 2024 and involved an entire gamut of tax policy. Some of the regions impacted include updates on the use of Aadhaar cards, changes in Securities Transaction Tax, updates on the rules pertaining to share buy backs, and introduction of the Direct Tax Vivaad se Vishwas Scheme 2024. All these changes have been approved as part of the Finance Bill.

1. Securities Transaction Tax (STT) for Futures and Options (F&Os):
       
Starting October 1, 2024, the Securities Transaction Tax (STT) on Futures and Options (F&O) will see an increase, with the rate rising by 0.02% for futures and 0.1% for options. Additionally, income generated from share buybacks will now be subject to taxation under the revised rules.
       
2. Aadhaar Enrolment ID not valid for PAN and ITR filing:
       
Effective October 1, provisions that allowed individuals to use their Aadhaar enrolment ID instead of the Aadhaar number when filing Income Tax Returns (ITR) or applying for a PAN will be discontinued. This step is aimed at preventing potential misuse and duplication of PAN.
       
3. Reduction in TDS on life insurance payouts:
       
From October 1, 2024, life insurance policyholders will benefit from a reduction in the TDS rate on their payouts. The tax deduction at source on these payouts will drop from 5% to 2%, allowing policyholders to receive a larger sum when their policies mature.
       
4. Share buybacks to be taxed at shareholder level:
       
Starting October 1, the taxation on share buybacks will shift to the shareholder level, aligning it with the tax treatment of dividends. This adjustment is expected to increase the tax liability for investors. The capital gains or losses will be determined based on the original purchase price of the shares.

       
5. Floating rate bonds TDS:
       
As per the Budget 2024, starting October 1, 2024, a 10% TDS will be applicable on income earned from certain central and state government bonds, including floating rate bonds. However, TDS will only be deducted if the total income exceeds ₹10,000 in a financial year, meaning no tax will be withheld for earnings below this threshold.
       
6. TDS rates:
       
- The TDS rates proposed in the Union Budget 2024 have been approved in the Finance Bill:
       
- The TDS rate under sections 19DA, 194H, 194-IB and 194M has been reduced from 5% to 2%.
       
- TDS rate for e-commerce operators reduced from 1% to 0.1%.
       
- Section 194DA – Payment in respect of life insurance policy
       
- Section 194G – Commission on sale of lottery tickets
       
Section 194H – Payment of commission or brokerage
       
Section 194-IB – Payment of rent by certain individuals or HUFs
       
Section 194M – Payment of certain sums by certain individuals or HUFs
       
Section 194F – Payment in case of repurchase of units by a mutual fund or UTI is proposed to be deleted from 1st October 2024.
       
7. Direct Tax Vivaad se Vishwas Scheme 2024:

The Central Board of Direct Taxes (CBDT) has introduced the Direct Tax Vivaad se Vishwas Scheme, 2024 (DTVSV, 2024), aimed at resolving outstanding income tax disputes. The scheme is set to take effect on October 1, 2024.

Under this scheme, new appellants will be eligible for a lower settlement amount compared to existing appellants. Additionally, taxpayers who submit their declarations before December 31, 2024, can benefit from a further reduction in the settlement amount.

Impact on traders and investors

According to experts, the most significant effect will be felt by those involved in high-frequency trading or those speculating on narrow margins. The STT hike will raise the cost of each transaction, which could reduce the appeal of frequent trades, especially in options, where premiums are already high.

The goal of these changes is to limit speculative trading. SEBI studies indicate that 89% of retail traders in F&O have experienced losses, often due to over-leveraging or underestimating market risks. By increasing the cost per trade, the government aims to promote more careful participation in the derivatives market.

Although large institutional investors may not be as affected due to their substantial resources and long-term strategies, they too will face higher costs for their F&O trades.

Why this move?

In recent years, the derivative markets have seen substantial growth, accounting for a significant portion of the overall trading activity on Indian stock exchanges. To align the tax structure with this increasing transaction volume, the government has revised the STT to better reflect the market's expansion.