Union Budget 2023 presented by the Finance Minister, Nirmala Sitharaman, on 1st February 2023 has proposed many amendments impacting taxation of individuals and HUFs. We broadly discuss some of these key proposals for Individuals/ HUFs from a direct taxation perspective.
1. Changes proposed in the ‘New personal tax regime’:
Union Budget 2023 has proposed quite a few amendments on the personal taxation front for the salaried class, aimed at making a shift from the old tax regime to the new tax regime under section 115BAC of the Act so that the old tax regime can be gradually phased out.
As a background, under the new tax regime introduced by Finance Act 2020 (though the tax rates were relatively lower) taxpayers were required to give up several deductions otherwise allowed like insurance premium, contribution to provident fund, Mediclaim, interest on house property, etc. Therefore, practically there were not many takers of the new regime. On the other hand, old regime involves allowance of numerous deductions/ exemptions making return filing more tedious and assessments more complex.
When the new tax regime for personal taxation was introduced, old tax regime was continued as the default regime and the taxpayers could opt for the new tax regime. However, in its endeavor to drive the shift of taxpayers from old to new regime, Budget 2023 has proposed to make the new tax regime as the default regime. Taxpayers would now need to file an online declaration in the prescribed form under section 115BAC (6) of the Act, on or before the due date of filing of original return under section 139(1) of the Act if they wish to continue in the old regime. Thereafter, changes have been made in the tax rates, deductions, etc. to make the new regime more attractive. The key changes along with their implications are summarized below:
a) Changes in tax slabs/ rates: the number of tax slabs in the new regime have been reduced and rate of tax for income levels upto INR 15 lakhs have been reduced.
b) From the above table it can be seen that the basic exemption limit (under section 115BAC) has been increased from INR 2.5 lakhs to INR 3 lakhs in the new personal tax regime.
c) The limit of rebate under section 87A has been increased from INR 5 lakhs to INR 7 lakhs. It is noteworthy that the aforementioned relief is in the form of a tax rebate under section 87A only and not by way of an increase in the basic exemption limit in the personal tax slabs. Therefore, taxpayers opting for the new regime in Financial Year 2023-24 and onwards, and having the gross total annual income of upto INR 7 lakhs, will not be liable to pay any income tax. However, if the income of an individual or an HUF i exceeds INR 7 lakhs (even by say one rupee), then rebate under section 87A will not be available and tax rates specified above shall be applicable.
d) In order to make the new tax regime a more lucrative option, the benefit of standard deduction of INR 50,000 on salary income has been extended under the new tax regime. Presently, taxpayers were not allowed any deductions under this option.
e) Deduction of one-third of family pension subject to maximum limit of INR 15,000, has also been extended under the new tax regime.
We now proceed to discuss the comparison between the tax rate slabs under the old and the new regime.
Based on a mere glance at the comparative tax rates, it is evident that the new tax regime is better/ more favorable. However, the key here is the trade-off between the preferential tax rate vis-à-vis the deductions to be foregone such as deduction u/s 80C, 80CCC, and 80CCD for making investments in specified funds of up to INR 2 lakh, deductions u/s 80D for medical insurance, 80E for interest paid on education loans, HRA exemption, LTA, etc.The result of this trade-off could be different for different taxpayers depending upon the amount of deductions they would otherwise claim. Therefore, the choice of the regime to be opted needs to be analyzed in an individual’s specific fact pattern based on which a calculated/ informed choice should be made. Provided below are few situational examples which could provide guidance on this matter:
in case of income levels upto INR 7 lakhs, new regime would be taxpayer favorable;
in case of income level of say INR 9 lakh, new regime would be better if deductions (other than standard deduction) being otherwise claimed are approx. INR 2 lakh. If deductions exceed INR 2 lakhs, then old regime would be better;
at an income level of INR 15 lakh, new regime would be better if the available deductions (other than standard deduction) are less than approx. INR 3.5 lakhs;
in case of income levels greater than INR 15 lakhs, taxpayer will benefit in new regime if the available deductions (other than standard deduction) are less than approx. INR 3.75 lacs. If deductions exceed INR 3.75 lakhs, then old regime would be better.
2. Reduction in Surcharge rate where income is more than INR 5 crores
The highest surcharge rate has been proposed to be reduced from 37% to 25%, thereby reducing the highest tax rate from 42.74% to 39%. This would lead to significant reduction in tax cost of taxpayers having income more than INR 5 crores. This change is applicable only if taxpayers opt for the new regime. For this income category, it appears that the new regime would be better.
3. Increase in exemption limit of leave encashment: under the existing law
The tax exemption of leave encashment received on retirement of an employee (other than a government employee) was capped up to a maximum of INR 3 lakhs. This limit has been proposed to be increased to INR 25 lakhs, thereby granting a significantly higher exemption limit for leave encashment.
4. Taxability of amount received on maturity of life insurance policies having premium exceeding INR 5 lakh per year
In order to dissuade taxpayers from considering insurance as a mechanism of investment, Budget 2023 has proposed to amend Section 10 to provide that in case of life insurance policies issued on or after 1 April 2023, wherein the aggregate premium paid exceeds INR 5,00,000 in a year, the maturity sum received shall not be tax exempt. The exclusion shall not be applicable in case claim is received on death of the insured person.
Accordingly, as is the case with ULIP issued on or after 1 February 2021, where the premium payable per year exceeds INR 2.5 lakhs, the maturity sum received is not be tax exempt, going forward sum received on maturity of any other life insurance policies issued on or after 1 April 2023 having premium exceeding INR 5,00,000 per year shall also be taxable.
5. Avoidance of double deduction of interest on borrowed capital
Deduction of interest on borrowed capital used for acquiring, renewing or reconstructing a property is allowed under section 24(b) of the Act under the head "Income from house property". However, while computing capital gains on sale of property, certain taxpayers claimed the same interest as cost of acquisition/improvement of the asset as well, thereby claiming a double deduction. In order to curb such double deduction, it is proposed that interest already claimed as deduction under section 24(b) shall not be considered as part of cost of acquisition/improvement.
6. Upward revision of Presumptive Taxation Limits
The presumptive taxation limits allowed to individuals, HUFs and Partnership firms under Sec 44AD (for small businesses wherein profits are presumed at 8% of gross receipts) and Sec 44ADA (for professionals like lawyers, doctors, engineers, etc. wherein profit is presumed at 50% of gross receipts) have been revised from INR 2 crore to INR 3 crore and INR 50 lakhs to INR 75 lakh respectively. The increase in limits is subject to the condition that cash receipts must be upto 5%. The amendment shall take effect from April 1, 2024.
7. Inclusion of Non- resident investors in the tax net upon issuance of shares above fair market value
Budget 2023, has proposed to bring issuance of shares by Indian companies to non-residents at a price above the fair market value within the purview of taxation. Any excess/ premium above the fair market value is proposed to be taxed as ‘income from other sources’ in the hands of the Indian company. Earlier, shares issued by Indian companies to only resident above the fair market value were included in the taxation net. This amendment is aimed at (i) aligning the Foreign Exchange Regulations and Income Tax Act; (ii) preventing generation and circulation of unaccounted money from non-resident investors in a closely held company in excess of its fair market value.
8. Gifts above INR 50,000 offered by resident to Not Ordinarily Resident without consideration shall be taxable
With effect from July 5, 2019, in cases where Indian residents offered gifts to non-residents (NRI) of any amount exceeding INR 50,000, without consideration, the same were considered as deemed to accrue/ arise in India and hence taxable. Budget 2023 has proposed to extend these provisions in case of gifts above INR 50,000 offered by resident Indians to not-ordinarily resident without consideration. The provisions shall apply starting April 1, 2024 and hence such gifts to RNORs shall be chargeable to tax from April 2024.
9. Limit on benefit claimed under section 54 and 54F
Section 54 and section 54F of the Act allows deduction on the Capital gains arising from the transfer of long-term capital asset if the taxpayer reinvests the consideration in a residential property on specified conditions.
The intent of this deduction was to give stimulus to house building activity. However, the government experienced that many HNIs are purchasing expensive properties in order to claim these deductions. Thus, in order to avoid this, Budget 2023 has proposed to impose a limit on the maximum deduction that can be claimed u/s 54 and 54F to INR 10 crores.
10. Capital gains arising from Market Linked Debentures to be treated as short term capital gain
Currently Market Linked Debentures (listed securities) are being taxed as long-term capital gain at the rate of 10% without indexation. These securities are in the nature of derivatives carrying interests which are linked with the performance of the market and would normally be taxed at applicable rates. Accordingly, Budget 2023 has proposed to insert a new section 50AA to treat capital gains arising from transfer, redemption or maturity of Market Linked Debentures as short-term capital gain. Consequentially, gains on such securities will now be taxable at normal applicable rates. The provisions would apply starting April 1, 2024.
Conclusion
The Government’s approach of providing at least some tax relief to majority sections of taxpayers (by way of increased exemptions, lower tax and surcharge rates, etc.) while simultaneously also being able to reduce compliance burden, brings more stability in the tax regime and rationalization of several provisions is certainly a welcome approach.
Shikha Gupta
Team Tax Exceller
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