Financial Sector Changes : 8 Major Changes in the Financial Sector Since October: Comprehensive Guide

Financial Sector Changes : The financial sector has witnessed significant reforms and regulatory changes in recent times. Starting from October, the Indian government and various regulatory bodies such as the Reserve Bank of India (RBI), the Insurance Regulatory and Development Authority of India (IRDAI), the Securities and Exchange Board of India (SEBI), and the Central Board of Direct Taxes (CBDT) have introduced new rules aimed at improving transparency, reducing litigation, and aligning financial practices with global standards.

From changes in Public Provident Fund (PPF) rules to alterations in the taxation of mutual funds and buybacks, these regulations are set to impact individuals and corporations alike. This essay explores in detail the major changes that have taken effect since October 2024 and their implications for various stakeholders.

1. Revised Rules for PPF Accounts of NRIs and Minors

Public Provident Fund (PPF) is one of the most trusted small-savings schemes in India, especially for those looking for safe investment avenues with tax benefits. However, recent regulatory changes have made it clear that non-resident Indians (NRIs) will no longer be able to maintain their PPF accounts under the same terms as resident Indians.

Key Change: Effective from October 1, 2024, any PPF account held by an NRI will be treated as a non-operational or inactive account. This is particularly important for NRIs who may have opened PPF accounts before moving abroad and did not disclose their non-resident status. As a result, these accounts will no longer earn interest, thereby disincentivizing further contributions.

For minors holding PPF accounts, the rules are more lenient, but parents and guardians are advised to be vigilant regarding compliance to avoid penalties. These changes represent a broader push by the government to curb misuse of small savings schemes by non-residents.

Impact on NRIs: NRIs holding PPF accounts must now review their investment strategies. While PPF has been a preferred investment for its safety and tax-free returns, the new rules mean that NRIs should explore alternative investment options that comply with Indian regulations.

2. Key-Facts Statement (KFS) for Retail Borrowers

Transparency in lending has always been a major concern in the financial industry, with many borrowers feeling overwhelmed by the complex terms and hidden charges associated with loans. To address these concerns, the Reserve Bank of India (RBI) has mandated that all banks and non-banking financial companies (NBFCs) provide a Key-Facts Statement (KFS) to retail borrowers from October 1, 2024.

Key Change: The KFS will include critical information about loan terms, including interest rates, processing fees, prepayment charges, and other key details. By ensuring that borrowers have access to this information upfront, the RBI aims to promote transparency and fairness in lending practices.

The KFS will provide a clear and concise breakdown of all loan-related costs, enabling borrowers to make more informed decisions and avoid hidden fees. This move is expected to benefit millions of retail borrowers, particularly those applying for home loans, personal loans, and vehicle loans.

Impact on Borrowers: Retail borrowers will now have a better understanding of the true cost of their loans. This could lead to more competitive loan products, as banks and NBFCs will have to ensure that their terms are transparent and attractive to borrowers. Additionally, borrowers can expect fewer disputes over hidden charges or unexpected fees.

3. Renewal of Old Life and Health Insurance Policies

The insurance sector has seen a significant push towards product standardization and compliance with new norms introduced by the Insurance Regulatory and Development Authority of India (IRDAI). Insurers were given a deadline of September 30, 2024, to ensure that all their existing life and health insurance products comply with the new guidelines issued in March 2024.

Key Change: Insurance companies were required to either withdraw or re-file products that did not meet the new regulatory standards. This process was aimed at ensuring that policyholders receive better protection and clearer terms for their insurance policies.

Impact on Policyholders: Policyholders of life and health insurance products should now review their policies to ensure that they are compliant with the latest regulations. This may involve renewing existing policies or considering alternative products that offer better coverage. IRDAI’s initiative is expected to result in a more streamlined and transparent insurance market, benefiting both new and existing customers.

4. Exit Payouts for Endowment Policyholders

Endowment policies, which combine life insurance with savings or investment features, have long been popular in India. However, many policyholders have been frustrated by low payouts if they choose to surrender their policies early.

Key Change: The IRDAI has introduced a new rule that mandates insurers to pay special surrender values even if policyholders exit their endowment policies after just one year. Previously, surrendering a policy within the first few years often resulted in little to no payout, making it an unappealing option for many policyholders.

Impact on Endowment Policyholders: This change is a welcome relief for endowment policyholders, as it gives them greater flexibility to exit underperforming policies without incurring significant losses. It also increases transparency in the insurance sector, where early exit penalties have often been a source of contention. Policyholders who are dissatisfied with their policies can now surrender them and receive fair compensation, encouraging greater trust in insurance products.

5. Reduction in Tax Burden on Mutual Fund Redemptions

Mutual funds are a cornerstone of the Indian retail investment landscape. However, the tax treatment of mutual fund redemptions has long been a point of contention. In an effort to reduce the tax burden on investors, the Indian government has introduced a significant change.

Key Change: Starting from October 1, 2024, the 20% tax deducted at source (TDS) on the repurchase of mutual fund units will be waived. This amendment to Section 194F of the Income Tax Act is part of a broader initiative to make mutual fund investments more attractive by reducing the tax liability on redemptions.

Impact on Investors: The waiver of 20% TDS on mutual fund redemptions is expected to boost investor confidence and encourage greater participation in the mutual fund market. This move aligns with the government’s goal of promoting long-term wealth creation through market-linked investments. Investors will now have more control over their returns and will benefit from higher post-tax payouts when redeeming their mutual fund units.

6. Direct Tax Vivarad Se Vishwas Scheme 2024

The government’s efforts to streamline tax compliance and reduce litigation have culminated in the launch of the Direct Tax Vivarad Se Vishwas Scheme, 2024. This scheme, effective from October 1, 2024, aims to provide taxpayers with an opportunity to settle their outstanding tax disputes at a reduced cost.

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Key Change: Under this scheme, taxpayers with pending disputes can opt for a one-time settlement by paying a portion of the disputed tax amount. The scheme seeks to reduce the backlog of tax-related cases, which has long burdened both taxpayers and the judicial system.

Impact on Taxpayers: The Direct Tax Vivarad Se Vishwas Scheme is expected to provide relief to thousands of taxpayers who have been entangled in lengthy litigation. By offering an opportunity to settle disputes at a reduced cost, the scheme encourages voluntary compliance and provides a faster resolution to tax cases. This initiative is also part of the government’s broader effort to simplify the tax system and make it more taxpayer-friendly.

7. Changes in the Buyback Tax Structure

Buybacks have become a common method for companies to return capital to shareholders. However, the tax treatment of buybacks has undergone a significant overhaul.

Key Change: Starting from October 1, 2024, the tax burden on buybacks will shift from companies to shareholders. Previously, companies were required to pay a 20% tax on buybacks, while shareholders received their returns tax-free. Under the new structure, shareholders will be liable for taxes on the buyback proceeds, effectively increasing their tax burden.

Impact on Shareholders: This change will particularly affect startup employees who hold Employee Stock Options (ESOPs) and plan to exit through buybacks. Shareholders will need to reassess the tax implications of participating in buybacks, as their post-tax returns could be significantly reduced. Companies may also need to rethink their capital return strategies, as buybacks may no longer be as tax-efficient as they once were.

8. Faster Bonus Issue Process for Trading

Bonus issues, where companies issue additional shares to existing shareholders, have long been used as a method to reward investors. SEBI has now introduced new guidelines aimed at speeding up the process of making bonus shares available for trading.

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Key Change: Effective from October 1, 2024, all bonus issues announced on or after this date will be made available for trading within two days of the record date. This change is aimed at improving market efficiency and ensuring that shareholders can trade their bonus shares more quickly.

Impact on Investors: This accelerated timeline for trading bonus shares is expected to benefit investors by providing faster access to their newly issued shares. It also reduces the uncertainty that often surrounds bonus issues, making it easier for shareholders to plan their investment strategies. Companies may also find this process more streamlined, as it aligns with SEBI’s broader push for greater market transparency and efficiency.

Financial Sector Changes – Conclusion

The regulatory changes that have come into effect since October 2024 mark a significant shift in the financial landscape. From revisions in PPF rules to the introduction of Key Facts Statements for borrowers, these changes aim to enhance transparency, reduce the tax burden on investors, and streamline financial processes. These reforms reflect the government’s commitment to improving the ease of doing business in the financial sector while protecting the interests of consumers and investors. As these changes take effect, individuals and companies alike will need to adapt to the new regulatory environment and take advantage of the opportunities it presents.

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