Budget 2024: Tax hikes shift burden to middle class as wealth gap widens

In a move likely to deepen economic divides, Union finance minister Nirmala Sitharaman presented the Union Budget for 2024-25 on Tuesday with key tax adjustments that shift the financial burden to the common man, particularly one trying to invest in real estate or the stock markets.

The Budget significantly hikes taxes on capital gains, increasing short-term capital gains tax from 15 to 20 per cent and long-term capital gains tax from 10 to 12.5 per cent.

This comes amid ongoing debates about potentially abolishing long-term capital gains (LTCG) tax altogether. Critics argue that these changes perpetuate a trend where the rich grow wealthier, while the financial strain intensifies for ordinary taxpayers, exacerbating the divide between the affluent and the less fortunate.

The increased tax burden on both short-term and long-term capital gains is seen as a stark departure from the earlier focus on encouraging investments.

Critics argue that these changes signal a clear intent by the government to curtail individual investment in areas like the stock market, redirecting liquidity back into banks. A move, economic observers suggest, that is aimed at funding government projects rather than fostering a flourishing investment environment.

Moreover, the removal of indexation benefits for assets such as gold and real estate has been described as a severe blow to investors. Previously, indexation allowed for the adjustment of purchase price based on inflation, which reduced the effective capital gains tax.

Without this benefit, the tax on a property purchased for Rs 10 lakh in 2000 and sold for Rs 1 crore in 2025 would see a significant increase, with tax obligations potentially rising from Rs 4-6 lakh to Rs 11-12 lakh.

The budget also includes increased tax on buybacks and dividends, compounding the financial strain on retail investors.

In contrast to developed nations like the US, which often offer more favourable tax regimes and substantial returns for their investors, India’s tax system seems to be leaning heavily on extracting more from the middle class and small investors.

The government's increased revenue targets—Rs 38.40 lakh crore for gross tax revenue, with Rs 22.07 lakh crore from direct taxes and Rs 16.33 lakh crore from indirect taxes—highlight a push for higher collections.

This ambitious goal is intended to support capital expenditure, subsidies, and welfare schemes while aiming for a better fiscal position and improved sovereign credit rating.

With a rise in net direct tax collections to Rs 19.58 lakh crore in FY 2023-24, surpassing previous estimates, the government’s fiscal strategy seems to be pivoting towards maximising tax revenue.

However, the lack of adjustments in personal income tax slabs and the heightened burden on investors have led to criticism that this budget unfairly penalises those who contribute diligently to the economy.

The reduction of corporate tax for foreign companies—from 40 per cent to 35 per cent—while providing some relief for foreign entities, further accentuates the disparity between domestic taxpayers and foreign corporations.

This move, while beneficial for multinational corporations and their operations in India, has been met with disappointment by many who feel it overlooks the needs of domestic taxpayers and small investors.

As a carefully study of the budget fine print gets underway, the implications of these changes will become clearer, but for now, the middle class and small investors face a more challenging financial landscape.