[Opinion] Finance Bill 2023 – A Mixed Bag for the Aam Aadmi and HNIs

Authored by Ankita Chowdhry & Medha Sharma | Chartered Accountant

Table of Contents

1. Proposals impacting Aam aadmi

2. Proposals impacting high net-worth individuals (HNIs)

3. Concluding Remarks

The Budget 2023 has laid emphasis on economic growth through capital expenditure, inclusive development, policy and administrative reforms, ease of doing business and reducing the tax burden for individual taxpayers.

The Hon’ble Finance Minister (FM) has acknowledged the importance of the middle class in Amrit-kaal of Indian economy, which is evident from the buoyancy in collection of personal income tax (including Securities Transaction Tax) which reflected an increase of 30.46%. In light of this, the FM has provided much needed relief to the individual taxpaye INR The following are the key budget proposals that would impact individual taxpayers:

1. Proposals impacting Aam aadmi

1.1 New income tax regime

The Finance Act, 2020 introduced a new income tax regime vide section 115BAC of the Income tax Act, 1961 (the Act) for individuals and Hindu Undivided Families (HUFs) with effect from Assessment Year (AY) 2021-22 to phase out multiple deductions and simplify the existing tax regime.

However, it was observed that the new tax regime was not very popular and as per news reports less than half a million taxpayers opted for the new regime since its rollout. One of the expectations from Budget 2023 was to make the new tax regime more lucrative. Accordingly, in response to the stakeholder demand, the following changes have been proposed in the new tax regime from 1 April 2024 (AY 2024-25):

• Change in slab rates

The slab rates are proposed to be reduced to five (from six) and the basic exemption limit is proposed to be increased to INR 3 lakh. The proposed slabs under the new tax regime are as follows:

• Enhancing the threshold for rebate

Under the new tax regime, rebate of 100% of the tax payable will be provided to taxpayers with taxable income upto INR 7 lakhs, which would be restricted to maximum of INR 25,000.

• Deductions for computing taxable income under the new tax regime

The following deductions are also proposed to be allowed while computing tax as per the new tax regime:

1. Standard deduction of INR 50,000 under section 16(ia) of the Act
2. Deduction for family pension as per section 57(iia) of the Act
3. Deduction for contribution by Central government to Agniveer Corpus Fund under section 80CCH(2) of the Act.

• Option to opt out from the new tax regime

The new tax regime is proposed to be the default tax regime and employer’s would consider the new tax regime for withholding tax purposes. Further, a person having income from business and profession who has in any financial year opted out of the new tax regime, can subsequently opt back for the new tax regime only once.

Considering there are fewer deductions available under the new tax regime, taxpayers need to evaluate the tax outflow under both the regimes and then opt for the most tax efficient regime. Also, the option needs to be exercised before the due date of filing the return of income.

1.2 Plug the loophole of double deduction of interest on borrowed capital:

As per section 24(b) of the Act, interest on borrowed capital utilised for acquiring, renewing or reconstructing a property can be claimed as a deduction while computing income from house property.

Taxpayers can opt to claim a deduction of interest on specified housing loan under Chapter VIA of the Act. In case deduction is claimed under Chapter VIA of the Act, no deduction can be claimed under other provisions of the Act.

However, certain taxpayers added such interest to cost of acquisition / cost of improvement of the asset while computing capital gains, thereby claiming a double deduction. In order to prevent such double deduction, it is proposed to amend section 48(ii) of the Act to provide that interest claimed as deduction under section 24(b) or Chapter VIA of the Act shall not be considered as part of cost of acquisition / cost of improvement for capital gains purposes.

This amendment is an anti-abuse measure which would curtail double deduction of the same amount.

1.3. Increase in thresholds for presumptive taxation

Section 44AD of the Act, inter-alia, provides for presumptive income scheme for small businesses and Section 44ADA of the Act provides for presumptive income scheme for small professionals.

Further, taxpayers availing benefit under the aforesaid presumptive schemes are not required to maintain books of accounts and comply with tax audit requirements under the Act.

In order to reduce compliance burden for small businesses and professionals, it is proposed to:

• Increase the threshold of gross turnover/gross receipts for presumptive taxation of business from INR 2 crore to INR 3 crore
• Increase the threshold of gross receipts from specified profession from INR 50 lakh to INR 75 lakh

The aforesaid increased thresholds would be applicable in case non-cash receipts constitute atleast 95% of the total gross receipts/turnover.

This proposed amendment would widen the tax net and simplify compliances for small and medium taxpayers.

1.4 Increase in threshold for exemption for leave encashment

As per section 10(10AA) of the Act, non-government employees can claim an exemption on account of receiving leave encashment at the time of retirement (whether on superannuation or otherwise), which is computed as per the manner prescribed. Currently, the maximum amount of exemption that can be claimed is INR 3 lakhs¹.

Considering the substantial increase in salaries and fact that the limit of INR 3 lakhs was fixed in 2002, it is proposed to increase the exemption limit for such leave encashment to INR 25 lakhs.

This would provide necessary relief to the salaried class, who is the most compliant taxpayer of the country.

2. Proposals impacting high net-worth individuals (HNIs)

2.1 Reduction in rate of surcharge:

Currently, the effective tax rate for HNIs having income exceeding INR 5 crore is 42.74%, which is much higher than tax rates for companies.

India is facing the issue of HNIs exodus, around 30,000 to 35,000 HNI’s left India in the last 5 years and it is estimated that 8,000 HNIs left India in 2022. This trend is expected to continue considering the high tax rates applicable to HNIs.

In order to address this issue, it is proposed to reduce the surcharge from 37% to 25% for taxpayers having income exceeding INR 5 crore, thereby reducing the effective tax rate for such taxpayers from 42.74% to 39%. This is a welcome move which will help to resolve the issue of HNI migration that negatively impacts tax revenue, wealth creation, employment generation and reduces consumption.

2.2 Tax on sum received from specified life insurance policies

It is proposed to amend section 10(10D) of the Act which provides exemption for sum received on maturity or claim received under a life insurance policy.

In order to curb the misuse of this exemption by HNI’s that used policies as an investment option, it is proposed that this exemption would not apply to life insurance policies (other than Unit Linked Insurance Plan) issued on or after 1 April 2023 where the premium or aggregate of premium exceeds INR 5,00,000 in a financial year. However, any claim received on death of the insured person on account of such policy would be exempt.

This is an anti-avoidance measure which would largely impact HNIs and the insurance sector.

2.3 Limiting the benefit claimed on account of reinvestment in new residential property

In case of long-term capital gain (LTCG) arising from transfer of a residential house, a deduction is available under section 54 of the Act, if the capital gain is reinvested in a residential house.

Further, in case of LTCG arising from transfer of any long- term capital asset other than residential house, deduction can be claimed under section 54F of the Act, if the net consideration is reinvested in a residential house.

The intent of introducing the aforesaid sections was to mitigate the acute shortage of housing and give impetus to house building activity. However, this purpose was being defeated by HNIs purchasing very expensive residential houses.

In order to curb such practices by HNIs, it has been proposed to cap the amount of deduction that can be claimed under section 54 and 54F of the Act to INR 10 crore.

2.4 Widening the ambit of TCS² provisions

Section 206C(1G) of the Act was introduced vide Finance Act, 2020 in order to collect the tax at source on remittances made under the liberalised remittance scheme (LRS) of Reserve Bank of India and remittance made towards overseas tour program package.

The rationale for introducing these provisions was to monitor the overseas remittances and correlate such remittances with the income tax returns of the person remitting funds.

According to RBI, in November 2022, outward remittance for maintenance of close relatives was USD 305.35 million, USD 220.90 million for gifts, and USD 211.65 million for overseas education. Remittances under LRS in

November 2022 reflected an increase of 29% compared to November 2021, and over 50% of remittance was for international travel³.

The revised TCS provisions would be as under:

While the existing TCS provisions suffice the purpose of creating a transaction trail, the increase in TCS rate and removal of threshold for aforesaid transactions would lead to cash flow issues as credit/refund for TCS amount can be claimed only while filing income tax return.

3. Concluding Remarks

Some of the key expectations which remain unfulfilled are enhancing the standard deduction, deductions linked to investments and medical insurance, simplification of capital gains tax regime. However, the mixed bag of proposals provides necessary relief to Aam aadmi, some relief to HNIs, plugs anti-avoidance and widens tax base while continuing to build the trust and confidence of stakeholders.

1. Notification No. SO 588(E), dated 31 May 2002.

2. Tax collected at source

3. https://www.rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=21510