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The term high net-worth individuals, popularly referred to as HNIs, is not defined anywhere but in common parlance would typically refer to a class of individuals who have an investible surplus of more than 5 crore or a net worth of above 25 crore. If we look at the income tax provisions, until assessment year (AY) 2023-24, individuals earning aggregate taxable income of above 5 crore were subject to a savage tax rate of 42.74%. As pointed out by the finance minister in her budget speech, this is among the highest in the world. In order to make the Indian tax regime more competitive, surcharge applicable for individuals whose gross taxable income exceeds 5 crore has been reduced from of 37% to 25% under the new tax regime. This change brings down the highest tax rate to a more palatable rate of 39%. However, before HNIs can rejoice, here are some other amendments proposed in the budget which may significantly increase their tax liability.

Limiting benefits claimed under section 54 and 54F

The existing provisions of section 54 and section 54F of the Income-tax Act allow deductions on the capital gains arising from the transfer of eligible long-term capital asset if an assessee, within one year of transfer or two years after the date of transfer, purchased a residential unit in India, or within a period of three years after that date constructed a residential unit in India.

For section 54 of the act, the deduction is available on the long-term capital gain arising from the transfer of a residential house if the capital gain is reinvested in a new residential house. And section 54F of the act, the deduction is available on the long-term capital gain arising from the transfer of other eligible long-term capital assets other than a residential house, if the net consideration is reinvested in a new residential house.

However, starting 1 April 2024, it is proposed to limit the maximum deduction that can be claimed under sections 54 and 54F to 10 crore. This means that where an individual sells an eligible long-term capital asset on which their gains arising is more than 10 crore and if such individual reinvests the entire consideration for purchasing a new residential unit; where earlier the entire capital gains amount would have been exempt, from AY 2024-25 onwards, only gains up to 10 crore would be exempt under the provisions of section 54 and 54F. The balance capital gains, ie above 10 crore, will now be taxed at a flat rate of 20% (with indexation). It may be noted that the maximum surcharge applicable on income from capital gains is restricted to 15% under both old regime and new tax regime.

Higher capital gains on market-linked debentures

Market-linked debentures (MLD) are instruments that offer fixed returns to investors based on the underlying market index’s performance. MLDs are popular investment tools for HNIs since they offer a stable rate with low risk (akin to a debt) but unlike interest on debt, which are taxable at slab rates, gains on the maturity of MLDs were taxed at a flat rate of 10% as equity under section 112A of the act (holding period of more than 12 months).

A new section 50AA of the act is proposed to be inserted for the taxation of MLDs. Under this section, from 1 April 2024, the full value of the consideration received or accruing as a result of transfer or redemption or maturity of such instruments shall deem to be short-term capital gains and taxable at applicable slab rates. It should be noted that even if, the MLD was acquired prior to 1 April 2024, the provisions of section 50AA of the act would be applicable where the transfer or redemption or maturity takes place after 1 April 2024. Further, no deduction will be allowed in computing the income chargeable to tax of any sum paid on account of securities transaction tax. However, the cost of acquisition of the debentures and any other expenditure incurred wholly and exclusively in connection with such transfer/redemption/ maturity shall be allowed as a deduction.

The above amendments coupled with an increase rate of TCS (tax collected at source) from 5% to 20% on overseas tour package and other remittances under LRS, is sure to increase the tax burden of HNIs. Given the recent amendments proposed in the past few budgets, there is a clear indication that the revenue authorities aim to withdraw all tax incentives applicable to HNIs and collect what they believe as fair and equitable tax from such individuals.

Neeraj Agarwala is partner at Nangia Andersen LLP. Neetu Brahma contributed to this article.

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