All eyes were on Budget 2023, awaiting steps that would quell the high net-worth individual (HNI) exodus that has been plaguing the country over the past few years. While the Budget has introduced some beneficial measures to attract global HNIs, there are also a few snags which may send a mixed signal to them.
On the positive front, HNIs are expected to have more in-hand money following the changes proposed in the Budget. The Budget proposes to cap the highest surcharge rate for such individual taxpayers who opt for the new tax regime to 25 percent from 37 percent at present. Consequently, the effective tax rate would now be reduced from 42.74 percent to 39 percent, ensuring a net savings of almost 4 percent on incomes of Rs 50 million (Rs 5 crore) or more. This proposal will provide relief to individuals with income above Rs 50 million who are taxed under the new personal tax regime, which henceforth is proposed to be the default tax regime for individual taxpayers.
While the highest personal income-tax rates charged under the new tax regime has reduced, the highest rate of income tax under the Indian tax laws continues to be 42.74 percent for individuals paying tax opting for the old regime. This dichotomy in the highest effective tax rates under the two regimes raises the question as to which of these tax rates should be considered the maximum marginal rate (MMR). Simply put, MMR is the rate of tax applicable to the highest slab of income; private discretionary trusts and certain other taxpayers are subject to tax at MMR. Thus, promoters and family businesses seeking to set up trust structures to hold their wealth and investments would need to wait and watch if the government issues any clarification in this regard.
A mixed bag of measures
The industry had expected a rationalisation of the capital gains tax (CGT) regime, but the Budget did not tinker with the CGT rates. However, there are other interesting changes which will have a bearing on HNIs from an investment perspective. Some of them have been discussed below.
— The Budget proposes to increase the rate of tax collected at source (TCS) from 5 percent to 20 percent on remittances made outside India under the Liberalised Remittance Scheme. HNIs looking to make investments in foreign securities or in GIFT City would be impacted by this proposal. While such HNIs can claim credit or refund of such TCS, their cash flows would be impacted at the time of making remittances.
— In order to promote households to convert their physical gold to electronic gold receipts (EGRs) and consequently encourage investment in electronic gold as an asset class, the Budget has proposed to exempt conversion of physical gold into EGRs and vice versa from the purview of CGT. This is expected to provide impetus to the recycling of gold and lower imports in the long run.
— Rollover benefit available on reinvesting capital gains arising from long-term capital assets into residential house property is now proposed to be limited. So far, HNIs have been able to claim 100 percent deduction on such capital gains by reinvesting such gains into expensive and luxurious real estate projects. The Budget proposes to limit the deduction available on such reinvestment to Rs 100 million (Rs 10 crore) to reduce the possibility of HNIs using such tax-saving measures. Any capital gains over this limit would be subject to the applicable CGT rates (which could go up to 23.92 percent). This is expected to impact the long-term financial planning and in-hand income of HNIs. It may also deal a blow to the upcoming real estate projects which look towards HNIs for making tax-efficient investments.
— The Budget has proposed to provide clarity on the taxation of market-linked debentures (MLDs), an investment instrument which is frequently used by the HNI community to earn higher returns than traditional bonds. The government has clarified that income arising from the transfer/ redemption/ maturity of MLDs — these being hybrid instruments — shall now be taxed as a short-term capital asset, at the applicable rates on such assets, irrespective of their period of holding. Under the extant laws, MLDs were being treated akin to listed securities. Accordingly, this proposal would increase the highest effective tax rate payable on gains arising from the disposal of MLDs from 11.96 percent (i.e., in case of long-term capital gains) to 39 percent, thereby increasing the tax costs for HNIs investing in them.
Thus, alongside the positive changes, the Budget 2023 also attempts to simultaneously expand the tax base by reducing several benefits available to HNIs. As a result, many go-to investment options for HNIs may relatively become less tax effective now. It would be critical for HNIs to undertake a case-specific impact analysis to recalibrate their investment portfolio basis their financial planning needs.
Rishabh Shroff is Partner & Co-head-Private Client at Cyril Amarchand Mangaldas. Kunal Savani is Partner at Cyril Amarchand Mangaldas. Views are personal and do not represent the stand of this publication.
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