All over the world, the budget exercise is actually a non-event. But in India, it is a big deal as we lay out policy initiatives as well as a roadmap for the future. Fortunes can be made or broken via the budget. This year the Adani Saga post the Hidenburg Research reports alleging fraud and manipulation in the group somewhat distracted the public’s attention from the budget. Even so..it was the most awaited and watched event in the financial year.
Here are some points in the budget for 2023-24.
First the good things
Capital expenditure has got a massive thrust with a planned spend of about 13 lakh crores. To modernise & upgrade Railways & Roads transport got high allocations of over 2 lakh crores.. Manufacturing in India will be supported and everything green will be promoted. FM mentioned in the budget speech, “We are implementing many programs for green fuel, green energy, green farming, green mobility, green buildings, and green equipment, and policies for efficient use of energy across various economic sectors.”
- There was a wide expectation that there will be tinkering in the capital gains rates. Nothing happened.
- The limit of Senior Citizen Saving Scheme’s limit has increased from 15 lacs to 30 lacs per individual. Very useful for retirees.
- The limit of the Monthly Income scheme of the Post office Saving Schemes has been increased to Rs. 9 lacs from Rs.4.5 lacs. Again very useful for retail and retirees.
- A new scheme has been announced Mahila Samman Saving Certificate.
Some Other Changes
Change in slabs of Personal Income Tax. It is a bit confusing but let me try to decode it.
There is an old personal income tax regime, where above 10 lakhs are taxed at 30% plus a surcharge. In this old income tax regime, you can claim exemptions and deductions from your income. There is a standard deduction of 50,000. There is an 80 C deduction up to Rs.1.5 lacs if you invest in specific instruments like PPF, insurance policies, equity-linked mutual fund schemes, and a few others. You can claim a deduction if you were paying interest on a house property, medical insurance premium, and whatnot. Post all the deductions & exemptions, on the balance income, you have to pay income tax.
The Finance minister announced a new regime in 2020 where there were no exemptions and deductions. In short, they wanted a simplified structure where there are no investments made to save tax. The old regime was still available for the taxpayers and optional.
The limit of no tax liability in the new regime announced in 2020 u/s 87 A was 5 lacs, which this year the FM increased it to 7 lacs or below.
And if your income is higher than 7 lacs then you pay as follows.
- Upto 3 lakh: no tax
- 3-6 lakh: 5%
- 6-9 lakh: 10%
- 9-12 lakh: 15%
- 12-15 lakh: 20%
- More than 15 lakhs: 30%
It is confusing when I just said that up to 7 lacs no tax. What it means is that say, your income is above the threshold say, Rs.7.5 lacs. Then you have to pay as above. To further understand the computations, Click here & here.
Insurance Policies that are sold as Investment Plans will be taxed.
The maturity benefits from Life Insurance plans enjoyed benefits of tax exemptions u/s 10 (10) D. In earlier budgets, Maturity benefits from Unit Linked Insurance Policies (ULIPs) were amended and taxed if they satisfied these conditions, the premium had to be less than 10% of the sum assured, and the absolute yearly premium was not above Rs.2.5 lacs.
This budget had a provision of taxing the maturity benefit of traditional policies that have a premium of more than Rs.5 lacs as per the investor’s slab. Keep in mind, the total premium on all policies will be added together to get to the limit of Rs.5 lacs to apply the tax.
The maturity benefit thus will be taxed under the head of Income from other sources, which as per current tax laws means will be added to your income and taxed at your marginal rate. The maturity benefit can be reduced by the premiums paid or the purchase price as long no tax benefit has been claimed under any other section of the Income tax.
Keep in mind, no death benefit or existing policies which fall into the above criteria will be taxed. These rules are applicable for policies bought after 31 March 2023.
These will impact wealthy investors who used to invest in guaranteed income insurance plans with high yields.
Tax on Market Linked Debentures – If there is a loophole or a grey area in the income tax, products are structured to use it and reduce tax liability. A market-linked debenture is one such product that is very popular as it was considered tax-efficient.
MLDs are nonconvertible debentures that were sold to High Net worth Individuals. They were structured in a way where the gains would vary depending on the movement of an Equity Index viz Nifty or Bonds yields viz the benchmark,10-year Government Security. The conditions of variation in the gain would be outlandish and most likely never happen. The investor thus would enjoy lower equity taxation of 10% on the gains, which was promised if the conditions were not satisfied. The tax arbitrage has been removed henceforth and all gains from MLDs will be taxed as a short-term capital gain of a debt asset, i.e. added to your income to be taxed at a marginal rate.
- Some Income of REITs/INVITs which were earlier tax-exempt is now under the tax net. If the Reit/Invit distributed loan repayment to the unit holders from the trust, it was not taxed. Now it will be.
- Income from online games was taxed above Rs.10,000. Now all income will be taxed at 30%, even the ones which lie still in the gaming account.
- If you plan to send money abroad then there will be a tax deducted at the source of 20%. This applies to almost everything, tour packages, buying assets, medical expenses, and education. In certain cases, there is a threshold of Rs.7 lacs. The TCS can be claimed back but there is a time lag as well the cash needed to shell out is much higher upfront. Clearly, the government wants to discourage money to be sent overseas.
- All listed debentures will have to deduct tax at source on interest payments which was earlier exempt.
- The super HNI’s can invest gains only up to Rs.10 Crores in a residential house to escape the tax net.
For a developing economy, the expenses are almost always more than the revenue, borrowings fund the gap which is called the fiscal deficit. It is a commendable target that the finance minister has set herself for the next year at @5.9% which is closer to the 4.5% target we have set ourselves to be achieved by 2026…
The Finance Minister has targeted a 5.9% of fiscal deficit by reducing expenditures & subsidies. The job guarantee scheme MNREGA spend is 60,000 cr, from the 78000 cr last year, 20% lower. Fertilizer subsidy is down to 1.75 lakh crore from 2.25 lakh crore this year. Food subsidy is down 30% in the next year to only Rs. 200,000 cr.
The general elections are just a year away and we just hope that these targets are adhered to. Can’t find fault with the intention of nation-building via capital spending and reducing doles and subsidies. Kudos, if they do.
If you wish to read and analyze the full budget document click here.
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