Budget 2023 did not throw any googlies

After much anticipation, the #UnionBudget2023 is behind us. There weren’t many large scale changes to income taxes that were announced. But out of the few announcements that were made, there are some that you might need to pay attention to.

We decided to put together these key changes for you in one place. Let’s deal with them one-by-one.

Sweetener for new personal #incometax regime

The Centre has been trying to push people to the new personal income tax regime with fewer exemptions and deductions. This year there is another push in the #Budget2023 proposals. The Budget proposals include change in slab rates, higher tax rebate, and reduction in surcharge for high earners.

This is how the two regimes stack up.

The key in deciding if you should switch to the new tax regime is whether or not you are eligible for exemptions like HRA, leave travel allowance, or deduction on interest and principal paid on a home loan for a self-occupied property. In addition, you must also consider all your tax saving investments and expenses (including 80C).

The increase in rebate under the new income tax regime means that if you have a taxable income up to Rs 7 lakh, then you won’t have to pay any income tax. This essentially means you forego deductions under section 80C (provident fund, ELSS, life insurance, housing loan principal repayment, etc) and voluntary NPS contribution (up to Rs 50,000), health insurance payment, interest on affordable house, interest on loan on purchase of electric vehicle, and much more.

Another sweetener to nudge high earners to switch to the new personal tax regime is capping the surcharge at 25% for those with taxable income of above Rs 2 crore. This means that if you have an income of above Rs 2 crore, your income tax rate will be capped at 39% (under new regime) including surcharge, compared to nearly 42.74% in the old personal income tax regime.

Do check out the Graph of the week at the end to find out what is your break even level of exemptions and deductions to remain in the old regime or switch to the new regime.

Payout on high premium insurance policies to be taxed

After bringing certain unit-linked insurance policies (yearly premium above Rs 2.50 lakh), Finance Minister #NirmalaSitharaman also proposed to tax insurance policies with annual premiums of above Rs 5 lakh. This means that the final payout on insurance policies with annual insurance premiums of above Rs 5 lakh (issued after April 1, 2023) will be taxed under the head income from other sources. In case the payout is received on death of the insured, then there will be no tax.

To calculate the amount of income that will be taxed on receipt of the payout, you can reduce the total premiums paid over the duration of the policy. In case you claimed any deduction (or part of it) on the premium paid (think 80C), then such portion of the premium will not be reduced from the final payout of the policy. Say you paid Rs 5.50 lakh premium every year for 10 years and you claimed Rs 1.50 lakh deduction every year under 80C. At the end of the term of the policy, you received Rs 1.10 crore. In such a scenario, your income will be Rs 70 lakh (Rs 1.10 crore - Rs 40 lakh)

Market-linked debentures tax arbitrage removed

Any gains you make on listed market-linked debentures will now be taxed at your slab rate as short term capital gains, without considering the period of holding. This means the tax arbitrage available to market-linked debentures is now gone. This makes them a little less attractive purely from a taxation perspective.

TDS exemption on interest on listed debentures removed

This is another minor tax arbitrage opportunity that is now being plugged. The interest paid was not subject to tax deduction at source (TDS) till now. The new Budget proposal has removed this exemption and interest paid on listed debenture will also come under the ambit of #TDS.

Capital gains exemption on purchase of house capped

Under the income tax law, if you use the long term capital gains on sale of an existing house or any other asset (like shares, mutual fund units, etc) to purchase another house, then you can avoid paying tax on the capital gains. These are available under section 54 (on purchase of a house after sale of a previous house) and under section 54F (on sale of any asset).

The Finance Minister has put an upper limit on the exemption on can claim at Rs 10 crore. Additionally, you can also park funds that you might use in future financial years for purchase of a house in a capital gains account with certain banks. This amount that can be parked has also been capped at Rs 10 crore.

Tax collection at source on foreign remittances rate increase

A few years ago, the Finance Minister introduced a provision for collecting tax at source (TCS) on foreign remittances. This was ostensibly done to create a trail for tax authorities to track such transactions. So essentially, when you send money abroad for various purposes, you will have to pay an additional amount as TCS to the bank. There was a carveout threshold limit for remittances (Rs 7 lakh) and lower rate for education and medical treatment (5% TCS) and education through a loan (0.5% TCS). Other remittances didn’t have a threshold limit and TCS rate was 5%.

Finance Minister’s Budget proposals will raise the TCS rate for other remittances to 20%. This means if you are travelling abroad and want to book a tour through a travel agency, this will require an additional 20% over and above the cost to be paid as TCS. Similarly, this will also apply to folks who buy shares of foreign companies through their brokerage account. There will be no threshold limit applied for TCS on these transactions.

All distributions by REITs and InvITs are taxable

REITs and InvITs that house cash generating assets distribute the cash they collect from these assets quarterly to the unit holders. These can be categorised as dividend, interest, rent and repayment of loans while distribution of the cash flows to unit holders. Till #FY23, dividend, interest and rent were taxed in the hands of unit holders of REITs and InvITs. The Budget 2023 proposals now even makes the distribution in the nature of loan repayment taxable in the hands of the unit holders.

No double deduction of interest on loan for property

If you have taken a loan to buy a house and claimed deduction under section 24 and section 80EE of the Income Tax Act, then from FY24 onwards you can’t add the interest amount to the cost of acquisition whenever you sell the property. Similarly, if you take a loan to renovate your house and claim the interest as deduction, the same amount can’t be added to the cost of improvement whenever you sell the home.

Conversion of physical gold to electronic gold receipts

The Budget has made it easier to convert your physical gold into an electronic gold receipt by exempting such conversion from capital gains tax. Similarly, conversion of such gold receipt into physical gold is also exempt from tax.

This means that when you deposit your physical gold with a SEBI-registered vault operator, it won’t be considered as a sale. The original holding period of the gold and the period during which it is converted into an electronic gold receipt (and back to physical gold) will be considered to calculate the total holding period whenever you sell your gold asset.

The Budget proposals are all incremental changes to plug loopholes to raise more taxes and nudge people to a simpler tax paying experience under the new personal tax regime. There are no big surprises.

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