[Opinion] Finance Bill 2023 – Taxing HNIs and relaxation for middle class individuals

Authored by Keval Sonecha – Partner | Sonecha & Amlani

Table of Contents

1. Changes in New tax regime

2. Consider applying for registration under MSMED Act, 2006

Union Budget 2023 reflects the objective of the government to increase the tax burden on HNI and reduce the tax burden on middle-class taxpayers. To achieve this objective, various changes are introduced in the Finance Bill 2023 like the relief given to middle-class taxpayers from Income tax liability up to the income of Rs 7 Lacs, or taxing HNI for life insurance proceeds received on maturity for a policy having premium exceeding Rs 5 Lacs a year. Hence, it becomes important for an individual taxpayer to look into the finer details of the Finance Bill, 2023 and assess how the budget affects his personal Income Tax.

1. Changes in New tax regime

It is a well-known fact that the new tax regime offers lower tax rates as compared old tax regime. However, the Finance Bill 2023 has increased the benefit for the taxpayer under the new tax regime including certain deductions which were not available earlier, such as:

• Standard deduction up to Rs 50,000.
• Deduction of 1/3rd of family pension income received from the employer or Rs 15,000 (whichever is less).
• Deduction for the amount paid or deposited in the Agniveer Corpus Fund under Section 80CCH(2).
• The benefit of reduced surcharge to 25% instead of 37% for taxpayers having income above Rs 5 Crores.
• No Income Tax up to the Income of Rs 7 Lacs.

The taxpayer will have to analyse the tax liability under both the tax regime and choose the beneficial option. There is no change in the old tax regime. However, while calculating the tax liability under the new tax regime, the taxpayer will have to consider the abovementioned tax benefits along with the revised tax slabs as under: –

The salaried individual will have to assess these changes while submitting the Investment declaration to their employer in April or May 2023. Considering the benefit under the new tax regime, those categories of taxpayers whose total income was Rs 7 Lacs and who invested Rs 1.5 Lacs to claim the tax benefits under section 80C to save the tax outflows, can now have free funds with multiple investment options as there is no tax liability till the income of Rs 7 Lacs under new tax regime.

2. Consider applying for registration under MSMED Act, 2006

The taxpayer having income from business or profession can consider applying for udhyam registration under MSMED Act 2006. The Finance Bill, 2023 has restricted the deduction of expenditure pertaining to MSME enterprise on a payment basis only. In other words, an entity can claim a deduction for the expenditure pertaining to a vendor registered under MSMED Act, 2006 only when it is paid. This provision is introduced to promote timely payments to micro and small enterprises.

The above changes benefit exclusively middle-class taxpayers. Let’s now look into the changes where the government has increased the tax burden for HNI.

Limiting the benefit claimed under Section 54 and 54F: – The deduction is available on the LTCG arising from the transfer of a residential house if the capital gain is reinvested in a residential house under Section 54. Similarly, in section 54F of the Act, the deduction is available on the LTCG arising from the transfer of any long-term capital asset except a residential house, if the net consideration is reinvested in a residential house. Earlier there was no limit of claiming the benefit under this sections. However, from FY 2023-24, the maximum limit has been imposed for the taxpayer to claim benefits under section 54 and 54F up to rupees ten crores. Therefore, if the cost of the new residential property is more than rupees ten crores, the cost of such asset shall be deemed to be ten crores.

Capital Gain from Investment in Market linked debentures: – Variety of hybrid securities that combine features of plain vanilla debt securities and exchange-traded derivatives are being issued through private placements and listed on stock exchanges. They are currently being taxed as a long-term capital gain at the rate of 10% without indexation. However, these securities are like derivatives which will be taxed at applicable rates.

Taxation of the amount received on maturity of Life Insurance Policies: – Amount received from ULIPs having premium payable exceeding Rs 2,50,000/- are already taxable. The Union Budget, 2023 has further taxed income from insurance policies (other than ULIP) having premium or aggregate of premium above Rs 5,00,000 in a year. This income shall be taxable under the head “income from other sources”. It is to be noted that the Kolkata Tribunal on 15th March 2022 in the case of Bishista Bagchi Vs. Deputy Commissioner of Income Tax have considered maturity received from life insurance policies as “capital assets”, however, life insurance policies taxed by the Union Budget 2023-24 is under “Income from other sources”. Income from life insurance continues to be exempt if received on the death of the insured person.

Apart from the above, one more clarification is in the Union Budget 2023 for the deduction of Interest on Housing loans. Interest on a housing loan can be claimed as a deduction under section 24 under “Income from house property” or it can be also claimed under “cost of improvement” while computing capital gain under section 48 of the Income Tax Act. However, interest on a Housing loan cannot be claimed under both sections. Therefore, it is clarified by the Government that the cost of improvement while computing capital gain shall not include interest claimed under section 24.

Dive Deeper:
Highlights of the Finance Bill 2023
Income Tax Slab Rates for A.Y. 2024-25 | F.Y. 2023-24
Union Budget 2023-24 | 45+ Recommendations and Expectations