What’s in store for HNIs in this budget

Having said that, there are some other budget proposals which, to an extent, take away the investment-linked benefits from wealthy individuals. Includes removal of exemption status for insurance policies with premiums in excess of 5 lakh per annum, a cap on the deduction limit for capital gains reinvested in a residential property, and tax benefits from market-linked debentures at individual slab rates.

Currently, a surcharge – a tax on a tax – for people whose income is higher 5 crores, as high as 37% of the tax amount under both the old and new tax regimes. This increases the highest marginal tax rate (including surcharge) to 42.74%, which is the highest tax rate imposed in the last three decades.

In Budget 2023, the surcharge rate of 37% has been reduced to 25%, but only for those in the new tax regime. “The highest surcharge will be 25% for income above 2 crores. This will reduce the maximum rate (for those whose income 5 crore) from about 42.7% to about 39%,” Nirmala Sitharaman said 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 from 2 crores 50 million. They will continue to be taxed at 39% (30% tax + 25% surcharge + 4% cess).

“High Net Worth Individuals or HNIs are being pushed by the government to adopt the new tax regime, which is clearly more beneficial to them,” said Saraswathi Kasturirangan, Partner, Deloitte India.

For example, the difference in tax liability with an individual’s income 10 crore between old and new tax regime will be a staggering 36.6 lakhs, 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 sale of residential property and any other capital asset, respectively.

The conditions are that the capital asset sold must be 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 promote house-building activity in India.

Budget 2023 imposed limit 10 crores on the maximum exemption that a person can avail from the above classes.

“It has been observed that huge deductions under these provisions are being claimed by high-net-worth assessees by purchasing very expensive residential houses. This is defeating the purpose of these sections,” the Finance Minister said.

As a result, the cap of Rs 10 crore will also be applied to 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, the capping of the deduction amount would affect only a section of taxpayers who are very wealthy with huge capital gains.

These amendments will be effective from 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 10 lakh gained traction among high-net-worth individuals over the past several years.

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

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

This proposal, which will be applicable from assessment year 2024-25, only affects HNIs investing in MLDs for tax benefits.

Besides this, the Budget also removed the exemption available under section 10(10D) on income with premium from insurance policies (other than a unit-linked insurance policy). 5 lakhs a year.

Currently, maturity proceeds from life insurance policies are tax-free where the premium is less than 10% of the sum assured.

However, the government noticed that the welfare objective of insuring the lives of individuals was misused, and huge sums were siphoned off by HNIs. Therefore, now to prevent misuse, if the total annual premium paid on life insurance policies exceeds 5 lakh, the income will no longer be exempted under the Act.

This is in line with the provisions applicable to ULIPs, or Unit Linked Insurance policies. The Finance Act 2021 has retained the exemption for ULIP income only for those policies whose total premium amount is less than 2.5 lakh per annum.

Note that these provisions will not be applicable for the amount received on the unfortunate death of the Life Assured. These high-premium insurance policies are mainly focused on HNIs, who will now be affected 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.