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Budget 2023: Multiple misses for HNIs offset joy of lower taxes

By Aman Rawat

  • 02 Feb 2023
Budget 2023: Multiple misses for HNIs offset joy of lower taxes
Credit: Thinkstock

Despite the Union Budget 2023 proposing to lower India's highest income tax rate, high-net investors (HNIs) are finding themselves in hot soup, owing to at least four new changes put forward by the government with the Finance Bill 2023. 

To begin with, finance minister Nirmala Sitharaman, while presenting the annual Budget on Wednesday, proposed a capping deduction from capital gains on investment in residential houses under sections 54 and 54F of the Income Tax Act to Rs 10 crore. 

For the unversed, sections 54 and 54F allowed a deduction on the capital gains if the assessee reinvested the gains in residential properties in a defined time grade. 

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Prior to the Budget 2023 announcement, there was no limit on how much dedication an individual can claim under sections 54 and 54F. The amendments in both sections will take effect from 1 April, 2024.

HNIs and UHNIs would utilize this avenue to reduce their capital gains tax liability, pointed out Vishal Yeole, vice president of business advisory services at Waterfield Advisors.

“The original intent of these exemption sections always had been to incentivize the Housing Sector and mitigate the shortage of housing. It was felt that the exemptions were not achieving the intended purpose and it is now proposed to substantially limit the arbitrage available on capital gains tax arising to HNIs/UHNIs,” Yeole added. 

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Another setback for HNIs is that the Union Budget 2023 proposed that market-linked debentures (MLDs) will now be taxed as short-term capital gains irrespective of the holding period. MLDs are listed securities which are quasi-debt and quasi-equity in nature. 

HNIs invested in MLDs not just for their returns, but because of the tax treatment they attracted, said Vaibhav Gupta, partner at tax and regulatory consulting firm Dhruva Advisors. 

Gains from the asset class so far attracted a 10% tax as they were considered long-term capital gains (LTCG). However, with the latest proposition, gains from MLDs will be taxed as short-term capital gains (STCG) at about 15%. 

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Meanwhile, Budget 2023 also proposed that the government will now levy tax on high-premium insurance plans issued on or after 1 April 2023. The taxes will be able on policies, whose yearly premium is above Rs 5 lakh. Since mostly HNIs were subscribers to these plans, they are likely to be hit the most. 

The final nail in the coffin is for HNIs who are non-residents and count themselves as startup investors,  is the expansion of the ‘angel tax’ beyond domestic investors. 

Non-residents will now come under the purview of Section 56(2) VII B, better known as ‘angel tax’, which is applied if the share price that is allotted to investors is at a premium to the fair market value (FMV) of the share. 

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On the other hand, possibly the only hit from Union Budget 2023 for HNIs was the reduction in the highest income tax rate from 42.74% to 39% under the new scheme of Income tax. 

“This would see increased adoption of the new tax regime for individuals,” said Dhruva Advisors’ Gupta, adding that it will benefit high-income bracket founders and professionals who can save taxes on their employee stock options (Esops).  

“The highest tax rate on personal income has also been brought down to address concerns on flight of HNIs,” said Ranen Banerjee - Partner and Leader, Economic Advisory Services, PwC India.

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