Budget 2023 Fineprint: A Mixed Bag for HNIs

To give impetus to the new tax regime, the Budget 2023 has introduced multiple benefits that would be available to taxpayers opting for this new regime. While softening of rates allowing for more disposable income in the hands of the middle class, to deal with inflation, was expected. Capping the surcharge for HNIs, by reducing the highest slab of surcharge from 37 per cent to 25 per cent, hence reducing the maximum marginal rate for HNIs from 42.74 per cent to 39 per cent, was a welcome surprise.

Having said that, the fineprint does have some unexpected surprises as well, which include:

Taxing Insurance Plans

To disincentivise insurance policies being packaged as tax free investment products, the Budget 2023 proposes to tax sum received from insurance policies, net of premium paid, if the annual premium paid is above Rs 5,00,000. The exemption, however, continues for any sum which is received upon the death of a person.

While the change for taxation of ULIPs was brought into the statute by Finance Act, 2021, Budget 2023 now proposes to include all insurance products within the ambit of tax. This will serve as a dampener for HNIs who will now be liable to tax on any proceeds, net of premium, at the effective tax rate of 39 per cent.

The change in taxation will apply to policies issued after April 1, 2023. Therefore, there will be no change in taxation for policies that were issued prior to April 1, 2023.

Taxation of Market Linked Debentures

Akin to listed securities, long term capital gain on sale of listed market linked debentures (MLDs) was being taxed at 10 percent. However, Budget 2023 has clarified that these securities are in the nature of derivatives and hence any gain on sale of such securities should be taxed as short-term capital gains.

In fact, the fine print suggests that regardless of the period of holding, gain on sale of MLDs will always be taxable as short-term capital gains at the applicable slab rate. This seems a tad harsh and will impact the future of MLDโ€™s as an instrument of investment.

Furthermore, unlike the grandfathering done for insurance policies taken prior to April 1, 2023, there is no grandfather clause for taxation gain on MLDs, meaning that any gain earned post April 1, 2023, will be taxable as short-term capital gains, even if such instruments were acquired prior to the Finance Bill 2023.

Capping of Capital Gain Exemption Upon Re-investment

The exemption available from capital gains tax on reinvestment of proceeds to buy a residential house property has now been capped at Rs 10 crore. This means that if a HNI earns long term capital gain of Rs 15 crore and invests the entire gain into buying another residential property, he will continue to be liable to tax on Rs 5 crore as the reinvestment deduction will be capped at Rs 10 crore regardless of the actual amount reinvested.

This will be a dampener for the luxury residential segment โ€“ which has been the primary driver of the sectorโ€™s uptick in the recent years, despite the pandemic. As per a recent report, HNIs believe real estate will be an important asset to hedge against inflation 1.

Increasing TCS rate on remittances being made under the Liberalized Remittance Scheme

Resident Indians are permitted to send US$ 250,000 per annum outside India as per the Liberalized Remittance Scheme (LRS) of the Reserve Bank of India. Such remittances were subject to an additional tax collection at source (TCS) of 5 per cent in case remittances in a year exceeded Rs 7,00,000.

The Budget 2023 proposes to increase the rate of TCS from 5 per cent to 20 per cent and do away with the minimum threshold of Rs 7,00,000, meaning whereby that Authorized Dealers will now collect 20 per cent on any sums being remitted under the LRS. However, if the remittance under LRS is for education or medical purposes, the TCS rate is proposed to be at 5 per cent and applicable if the remittance exceeds Rs 7,00,000 in a year.

The TCS rate of 5 per cent has also been increased to 20 per cent for sale of overseas tour packages. Clearly the message is to discourage movement of funds overseas especially in light of the elevated current account deficit. Like they say you win some, you lose some โ€“ this Budget is a mixed bag for the HNIs.

(The author is partner (private client services) at Grant Thornton Bharat)

Read all the Latest Business News here

Source link