2024: Changes That Matter

The year 2024 has been a game-changer for the Indian regulatory landscape, with the Securities and Exchange Board of India (Sebi), Insurance Regulatory and Development Authority of India (Irdai), the Reserve Bank of India (RBI), the Pension Fund Regulatory Development Authority (PFRDA) and the Income Tax Department proposing key changes that will benefit investors, policyholders, pensioners, taxpayers and consumers alike. We give you a lowdown on five key changes proposed by each of these regulators

Capital Markets

Put Option For Bond Investors: Sebi unveiled a new voluntary “put option” for investors to sell bonds back to the issuers on specific dates at up to 100 basis point (bps) discount. Effective from November 1, 2024, this aims to enhance the liquidity of corporate bonds and boost the confidence of retail investors and growth-stage issuers. This allows bond investors to sell their bonds back to the issuer at specific dates with a slight discount and enhances investor flexibility and liquidity in the bond market. By mitigating interest rate risk, it encourages greater participation and reduces uncertainty for investors.

MFs Under Insider Trading Regulations: Sebi has brought mutual fund (MF) houses under the Prohibition of Insider Trading Regulations, 2015. This change, effective November 1, 2024, mandates MFs, trustees, employees, and directors to comply with insider trading regulations, such as disclosing MF holdings quarterly, and barring them from selling MFs if they have privileged information. Bringing MFs under insider trading regulations strengthens investor protection. It prohibits fund managers and other related personnel from utilising confidential information for personal gains or to benefit specific investors. This move enhances transparency and builds trust among investors, ensuring fair and equitable treatment for all.

Small Cap Funds Stress Test: Sebi has mandated stress tests for small-cap funds to assess their ability to handle large redemptions during market downturns. Recent tests show improved liquidity, with small-cap funds now requiring an average of 13.7 days to liquidate 50 per cent of their portfolios. This is a positive sign, but investors should still carefully evaluate liquidity profiles of individual funds and consider their risk tolerance before investing. Among the largest 10 small-cap funds, five saw improvements in their liquidity positions in March 2024.

Changes To Demat Account Rules: Sebi has proposed changes to the Basic Services Demat Account (BSDA) rules, such as increasing the limit from Rs 2 lakh to Rs 10 lakh for combined value of securities, one account for depositories, and lower fees. It allows more retail investors to trade while enjoying the benefits of a BSDA, such as no annual fee for portfolio values up to Rs 4 lakh, and Rs 100 for those between Rs 4 lakh and Rs 10 lakh. This change increases accessibility and affordability for retail investors, simplifies the account opening process and encourages greater participation in the stock market.

Easy KYC Rules: Sebi has asked intermediaries to continue updating the know-your-customer (KYC) data on the KYC Registration Agencies (KRA) systems. KRAs have been mandated to upload the details on the Central KYC Records Registry (CKYCRR) within seven days, and complete the process in six months starting August 1, 2024. It is aimed to ensure that the latest verified information is in official records, thus ensuring safe transactions and reduction in KYC-related issues. This measure helps prevent fraudulent activities and ensures protection of investor interest through better identification and verification procedures.

Sebi has also eased the KYC rules for MF investors by allowing them to redeem their investments if their KYC is on hold status, or verify it with Aadhaar, Permanent Account Number (PAN), and either their registered email or mobile number, instead of both. Non-resident Indians (NRIs) were also given a one-year extension to validate their KYCs. This process reduces the administrative burden on investors while improving their overall investing experience.

Insurance

100% Cashless Health Claims: Irdai has directed insurers to transition to a 100 per cent cashless claim settlement protocol to ensure quicker and smoother medical claim settlements during any medical emergency. Insurers have been asked to collect all claim-related documents directly from the hospital without bothering the policyholders.

Most importantly, the turnaround time for cashless health insurance claims was revised, with insurers required to provide a pre-authorisation approval to a hospital within 30 minutes, and the final claim settlement within three hours of the final bill being generated.

Taming The Mis-Selling Monster: Fixing mis-selling, whether through bancassurance or any other channel, has always been the regulator’s priority. Recent remarks by top officials in Irdai and other regulatory bodies, besides senior finance ministry officials advising banks to focus on banking activity with insurance sales as a side activity are important.

At present, almost 55 per cent of premiums come from the bancassurance channel. One of the major concerns, particularly in bancassurance, is that vulnerable customers, such as senior citizens, may be misled into buying regular premium policies they don’t fully understand or need.

Increase In Surrender Values: The surrender value that policyholders get after giving up a policy in the early years is usually low, as insurers look to recoup costs, such as commissions, underwriting expenses, and so on. But this results in a huge loss for policyholders, some of whom may have been surrendering because they were mis-sold a policy they don’t need. Irdai has now increased the surrender value in the early years. This may ensure that the selling process becomes more stringent.

Previously, there was a three-year waiting period for surrender value, leading to significant losses for policyholders who couldn’t continue paying premiums or decided to lapse their policies.

Now, the surrender value is almost equivalent to the premium paid in the first year, with minimal adjustments. The surrender period has also been extended from 30 to 45 days, further empowering the customer to make better decisions. This change ensures that customers have up to 365 days to reconsider or cancel policies, say experts.

Boost To Innovation, Affordability: Irdai has directed insurers to develop customised insurance products tailored for specific groups, such as senior citizens and children. Moreover, it has asked insurers to keep such products cost-effective.

Irdai has also enabled greater product innovation. For instance, insurers can now offer modular plans where coverage is adjustable, which can significantly reduce premiums. Customers can upgrade or downgrade room categories, and get a discount.

Additionally, Irdai has encouraged insurers to introduce flexible payment options, such as monthly premium modes.

TDS On Insurance Commission: The Union Budget 2024 reduced the tax deduction at source (TDS) on insurance commission from 5 per cent to 2 per cent for individual agents, effective April 1, 2025. Further, the TDS rate for the payment of bonus or proceeds in life insurance policies was reduced from 5 per cent to 2 per cent, effective from October 1, 2024. While the first change would mean that agents will receive higher commissions, the reduction in TDS rates for the payment of bonus or proceeds in life insurance policies would mean higher receivables for policyholders on maturity.

Banking

RBI Repo Rate Unchanged In 2024, CRR Cut Recently: RBI maintained the repo rate at 6.5 per cent throughout 2024. In fact, rates haven’t changed after February 2023. However, on December 6, 2024, RBI reduced the cash reserve ratio (CRR) by 50 bps, lowering it to 4 per cent from 4.5 per cent. This move is aimed at enhancing liquidity in the financial system and supporting the profitability of financial institutions. The CRR cut is expected to stimulate borrowing by businesses and individuals, thus fostering economic activity (see page 94 for more on CRR).

New Rules For Inactive Accounts: RBI announced new guidelines in January 2024 for managing unclaimed deposits and inoperative accounts, which came into effect on April 1, 2024. Under these rules, banks must classify accounts as unclaimed if there are no transactions for 10 years, or if term deposits remain unclaimed for 10 years after maturity. Banks are required to conduct annual reviews of such accounts and notify account holders if there is no activity in the previous year. RBI’s 2024 guidelines include the use of the UDGAM (Unclaimed Deposit-Gaining Access to the Marketplace) portal, which was launched earlier, to help depositors easily search for unclaimed deposits across multiple banks. The updated rules make reactivating inoperative accounts penalty-free.

Increase In UPI123Pay And UPI Lite Limits: In October 2024, RBI increased the transaction limits for UPI123Pay and UPI Lite to enhance digital payment accessibility. The per-transaction limit for UPI123Pay was raised from Rs 5,000 to Rs 10,000; and banks are expected to implement the change by January 1, 2025. UPI Lite’s wallet limit was also increased from Rs 2,000 to Rs 5,000, and its per-transaction limit rose from Rs 500 to Rs 1,000, effective December 4, 2024. These updates aim to boost financial inclusion, particularly in the rural areas, by enabling small, offline transactions and increasing access to digital payments for those with limited internet connectivity.

Moves Against Fraud: In December 2024, RBI announced the introduction of MuleHunter. AI, an artificial intelligence (AI)-based system designed to enhance the detection of mule accounts, commonly used for money laundering. MuleHunter.AI is set to improve fraud detection accuracy and efficiency.

RBI also tabled a new draft for the Framework on Alternative Authentication Mechanisms for Digital Payment Transactions, with the aim of securing digital transactions and preventing banking fraud. This draft suggests introducing additional factors of authentication for payments. As of now, no specific factor has been mandated for additional authentication. At present, the digital payments ecosystem is primarily based on SMS-based one-time passwords (OTPs).

New Framework For KYC, Domestic Money Transfers: RBI updated its KYC guidelines, effective November 6, 2024, to align with changes in legal frameworks such as the Prevention of Money Laundering Rules and the Unlawful Activities (Prevention) Act. Key amendments include streamlined verification processes for KYC-compliant customers, with no new customer due diligence required for additional services. The guidelines clarify the definition of high-risk accounts, ensure periodic KYC updates, and mandate that all KYC data be uploaded to the CKYCRR.

RBI also rolled out a new framework for domestic money transfers in July 2024, effective November 1, 2024. It includes enhancing KYC record standards. The primary objective of these regulations is to improve the security of domestic money transfers, while ensuring compliance with prevailing financial laws.

Taxation

New Tax Slabs And Rates Under New Regime: The Union Budget 2024-25 introduced revised tax slabs under the new tax regime. “The new tax regime rate has been revised to provide salaried employees with significant benefits, offering up to Rs 17,500 in income tax savings,” said Union Minister of Finance Minister Nirmala Sitharaman in her Budget Speech.

Hike In Standard Deduction: This is applicable only under the new tax regime. The Budget changed the standard deduction for salaried employees from Rs 50,000 to Rs 75,000 under the new tax regime.

Apart from standard deduction, the new tax regime does not allow other popular deductions such as under Section 80C, 80D and others of the Income-tax Act, 1961, which are allowed under the old regime.

Sitharaman also enhanced the deduction from family pension for pensioners from Rs 15,000 to Rs 25,000.

Revision In Taxation Of Capital Gains: Budget 2024-25 announced changes to the taxation of capital gains, and announced new tax rates for both short-term capital gains (STCG) and long-term capital gains (LTCG), impacting a wide range of investors.

STCG from the transfer of listed equity shares, units of business trust, and units of equity-oriented mutual funds will now be taxed at 20 per cent, up from 15 per cent. STCG on other instruments remain subject to taxation according to the slab rates.

All LTCG for all categories of assets are now taxed at a flat rate of 12.5 per cent without indexation, except for land and/or building acquired before July 23, 2024. Previously, the tax rate was 10 per cent for certain securities, such as listed equity shares, units of business trust, and units of equity-oriented MFs. Listed bonds were subject to certain conditions and the rate was 20 per cent with indexation for other assets.

However, capital gains on the transfer of equity shares and units of equity-oriented MFs listed in India are now exempt up to Rs 1.25 lakh up from the earlier Rs 1 lakh.

TCS/TDS Changes: Starting October 1, 2024, tax collected at source (TCS) and TDS under other sections, such as rent or insurance can be adjusted with TDS on salary income. Also, homebuyers must deduct 1 per cent TDS on the sale value or stamp duty value of the property (whichever is higher) when purchasing immoveable properties above Rs 50 lakh (which should be the total combined transaction value).

Also, TDS has been reduced on rent payments under Section 194-IB to 2 per cent from 5 per cent on payments exceeding Rs 50,000 per month by individuals or HUFs.

Previously, TCS credits collected in a minor’s name could only be claimed under the minor’s tax liability. The new provision, effective January 1, 2025, allows TCS credits in the minor’s name to be adjusted against the parent’s tax liability if the minor’s income is clubbed with the parent’s income. However, there is no clarity about cases where the minor has no income.

Indexation Benefit For Real Estate: The Budget withdrew the indexation benefit which adjusted the cost of assets for inflation for all immoveable property, except for land and/or building acquired before July 23, 2024, by an individual resident or Hindu Undivided Family (HUF).

However, after several protests, the government made this optional. Now, sellers can either opt for the earlier capital gains rate of 20 per cent with indexation or 12.5 per cent without indexation. This is applicable for land and/or building sold on or after July 23, 2024 and acquired before July 23, 2024.

Balanced Life Cycle Fund For NPS Private Sector Subscribers: PFRDA launched the Balanced Life Cycle (BLC) Fund on Pension Diwas, October 1, 2024. This is designed especially for the ‘corporate and all citizen’ model subscribers of the National Pension System (NPS). The BLC Fund allows up to 50 per cent of the portfolio to be allocated to equity, with equity tapering starting at age 45—10 years later than the current Auto Choice option, where tapering begins when the subscriber reaches age 35. The original Auto Choice option, however, will also be available. For subscribers opting for the Active Choice investment, the maximum equity allocation can be up to 75 per cent until age 50, and tapering starts after that.

NPS Vatsalya: In Budget 2024-25, Sitharaman announced a savings-cum-pension scheme for minors within the NPS framework, named NPS Vatsalya.

The scheme was formally launched on September 18, 2024. Under this scheme, parents and guardians can open an NPS Vatsalya account for their children below 18 years of age. Partial withdrawal up to 25 per cent is allowed after a lock-in period of three years for specific purposes, such as education, specified illnesses, or disabilities. Once the child turns 18, the account will be converted into a regular NPS account, or, if the child prefers, they may exit the scheme. All other features and options in NPS Vatsalya are the same as those available for regular NPS accounts.

NPS Contribution Limit Increased To 14% For Corporate Employees: Another significant update in NPS this year is the enhancement of the maximum contribution limit from 10 per cent to 14 per cent for corporate employees, which was announced by Sitharaman in Budget 2024-25 in July 2024.

This increase applies to all non-government employees, including those in private companies, public sector undertakings (PSUs), and public sector banks.

The additional 4 per cent contribution over the long term can make a huge difference in creating a larger retirement corpus for NPS subscribers.

NPS Payment Through Bharat Bill Payment System (BBPS): On August 28, 2024, PFRDA introduced the BBPS option for making NPS contributions. This is an additional channel to make NPS payments, besides the eNPS portal, NPS mobile App, bank portals, and physical submission through cheque or demand draft to the service provider.

PFRDA said in a circular: “Subscribers can make contributions using multiple payment applications, such as BHIM, PhonePe, etc.” This step aims to simplify and diversify the payment methods available for NPS subscribers.

Same Day Investment Of Contribution: Through a circular dated June 26, 2024, PFRDA introduced same-day (T+0) settlement for NPS contributions, replacing the earlier next-day (T+1) system for investments made until 11am on a business day. It became effective from July 1.

PFRDA said in the circular: “Contributions received by TB (Trustee Bank) till 11 AM (T) on any settlement day will now be considered for same-day investment. This new timeline for same-day investment will be effective from July 1, 2024. Contributions received by TB after 11 AM will be invested on the next day (T+1)”.

Subscribers can contribute to NPS either offline by way of depositing cash or cheque, or online through the NPS app, unified payments interface (UPI), or netbanking.

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