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In a major relief to high-net-worth individuals, finance minister Nirmala Sitharaman announced a reduction in the highest surcharge rate from 37% to 25%, for those paying taxes under the new tax regime.

Having said that, there are a few other budget proposals that took away investment-linked benefits, to an extent, from rich individuals. These include the removal of exempt status for insurance policies with a premium of more than 5 lakh per annum, a cap on the deduction limit for capital gains that are reinvested in a residential property, and taxing gains from market-linked debentures at individual slab rates.

At present, the surcharge—the tax on tax —for those with income exceeding 5 crore, is as high as 37% of the tax amount under both the old and new tax regimes. This pushes the highest marginal tax rate (including surcharge) to 42.74%, which is the highest tax rate levied in the last three decades.

In Budget 2023, the surcharge rate of 37% has been slashed to 25%, but only to those in the new tax regime. “Highest surcharge shall be 25% for income above 2 crore. This would reduce the maximum rate (for those with income more than 5 crore) from about 42.7% to about 39%," said Nirmala Sitharaman in her fifth Budget speech since 2019.

Note that, there is no difference in the tax rate for those in the income tax slab of 2 crore to 5 crore. They will continue to be taxed at 39% (30% tax + 25% surcharge+4% cess).

“It is a nudge by the government to make high networth individuals, or HNIs, adopt the new tax regime, which is clearly more beneficial for them," said Saraswathi Kasturirangan, partner at Deloitte India.

For example, the difference in the tax liability of an individual with an income of 10 crore between the old and new tax regime would be a staggering 36.6 lakh, which is essentially due to the lower surcharge rate in the latter regime.

These provisions are applicable from the financial year starting 2023-24.

The existing provisions of section 54 and section 54F of the Income-tax, 1961 allow exemption on capital gains from the sale of a residential property and any other capital asset respectively.

The conditions are that the capital asset sold should have been held for more than three years and the proceeds are used to purchase any residential property in India within a specified time period. These sections were introduced to give a leg-up to the house-building activity in India.

Budget 2023 imposed a limit of 10 crore on the maximum exemption that an individual can get from the above-said sections.

“It has been observed that claims of huge deductions by high-net-worth assessees are being made under these provisions, by purchasing very expensive residential houses. It is defeating the very purpose of these sections," said the finance minister.

Consequently, the cap of 10 crore will also be made applicable for deposits in the Capital Gains Account Scheme, which allows individuals to park their capital gains in a separate account until it is reinvested.

According to Kasturirangan, capping of deduction amount will only impact a fraction of taxpayers who are very wealthy with very high capital gains.

These amendments will take effect from the assessment year 2024-25

Market-linked debentures (MLDs)— structured products that invest in both fixed-income and derivative instruments— that come with a minimum investment amount of 10 lakh gained traction among high-net-worth individuals in the last many years.

Listed MLDs are taxed at 10% after a one-year holding period, similar to equity.

Budget 2023 highlighted that these securities are in the nature of derivatives which are normally taxed at applicable rates. To plug the loophole, the finance minister proposed that the sale or redemption, or maturity of these securities will be treated as short-term capital gains and will be taxed at the applicable individual slab rates.

This proposal, which will be applicable from AY 2024-25, impacts HNIs who are investing in MLDs, solely for tax benefits.

Further, the budget also removed the exemption available under section 10 (10D) on income from insurance policies (other than a unit-linked insurance policy) with a premium of more than 5 lakh a year.

Currently, the maturity amount received from the life insurance policy is tax-exempt where the premium is less than 10% of the sum assured.

However, the government observed that the welfare objective of insuring the individuals’ life was misused, and large sums were received by HNIs. Therefore, to curb the misuse now, if the aggregate annual premium paid on life insurance policies goes beyond 5 lakh, the proceeds will no longer be exempted under the Act.

This is to align with the provisions applicable to ULIPs, or unit linked insurance policies. The Finance Act 2021 retained the exemption for ULIP income only for those policies with a total premium amount of less than 2.5 lakh per annum.

Note that these provisions will not be applicable for amounts received on the unfortunate death of the insured. These high-premium insurance policies have been focused mainly on HNIs, who will now be impacted by the budget proposal.

Unlike ULIPs, where the Act was effective from the budget date (1 February 2021), the new provision for traditional insurance plans is effective from 1 April 2023.

ABOUT THE AUTHOR
Satya Sontanam
Satya Sontanam is a senior content creator at Mint with a keen interest on data crunching, analysis and the story behind trends. She writes on personal finance including investments, regulations and data stories. Before joining Mint in December 2021, Satya worked as research analyst and also a personal finance writer at The Hindu BusinessLine. Satya is a qualified chartered accountant. In her free time, she enjoys doing yoga and listening to podcasts.
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