– By Kunal Savani and Bipluv Jhingan
In wake of the exodus of various super rich from the country in the past few years, Budget 2023 has tried to send positive signals to High Net-worth Individuals (HNIs). The Hon’ble Finance Minister, in her budget speech, recognized that the present highest surcharge rate (i.e., 37 per cent) has resulted in India charging one of the highest personal income tax rates in the world (i.e., 42.744 per cent).
Accordingly, Budget 2023 has proposed to reduce the highest surcharge levied on individuals with income above Rs 50 million, from 37 per cent to 25 per cent. Henceforth, the highest personal income tax rate would stand reduced to 39 per cent, as against 42.744 per cent. However, this reduced rate of surcharge is only available to individual taxpayers who have opted to be governed by the new personal income tax regime, which was introduced vide Finance Act, 2020.
The new personal income tax regime offers lower income tax rates and more slabs, provided the taxpayer forgoes certain tax exemptions and deductions (such as the option to carry forward certain unabsorbed depreciation, deductions availed under numerous tax-saving investment schemes, etc.) that are available under the old personal income tax regime. Till date, the new regime has not had many takers considering the benefits offered thereunder were not significant enough, as compared to the old regime. However, with the proposed reduction in surcharge rates, it is expected that the new personal income tax regime should become the go-to-choice, especially for HNIs.
A corollary of reduction in the personal income tax rates is the reduction in the Maximum Marginal Rate (MMR) which is applicable to certain trusts, association of persons, etc. MMR has been defined to mean the rate of tax, including surcharge, applicable to the highest slab of income of an individual, association of persons, etc.
At present, the effective tax rate applicable to the highest slab of income, under both the regimes (i.e., the old personal income tax regime and the new personal income tax regime) was the same, i.e., 42.744 per cent. However, with Budget 2023 proposing to reduce the highest effective rate to 39 per cent under the new personal income tax regime (while the effective rate under the old regime is still at 42.744 per cent), there remains an ambiguity as to which of the two rates should be considered as the MMR. The definition of the term MMR also does not provide any guidance in this regard. Thus, one will have to wait and watch if the Government provides any clarity before the Finance Bill is passed.
It should be noted that the proposed amendment would be effective from April 1, 2023 (i.e., assessment year 2024-25). Thus, individual taxpayers will be able to take benefit of the lower surcharge rate only from the following assessment years and the surcharge rate of 37 per cent will continue to apply for the current year.
|Tax rate for individuals |
with income above Rs 50 million
|Effective rate (current regime)||Effective rate (proposed regime)||Difference in effective rate|
(Kunal Savani is Partner and Bipluv Jhingan is the Principal Associate at Cyril Amarchand Mangaldas)