Budget proposals bitter-sweet for HNIs, govt says loopholes being plugged | The Financial Express

Budget proposals bitter-sweet for HNIs, govt says loopholes being plugged

Tax experts say higher TCS on remittances abroad amounts to double taxation

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According to the relevant Budget proposal, any overseas remittances, except for education and medical treatment, will attract TCS of 20% regardless of value.

While the Budget proposal to reduce the marginal rate of income tax from 42.74% to 39% by slashing the highest surcharge hogged the headlines, a few other clauses in the Finance Bill, 2023 have the super-rich worried. These high net worth individuals are concerned over a few proposals in the Budget related to capital gains tax, high value insurance as well as taxation of market-linked debentures.

Tax experts say at least one of these concerns are legitimate, especially the one over the steep hike in the tax collected at source (TCS) for expenses and investments, which effectively would make this tax from being a tool to monitor remittances abroad, to a significant source of revenue for the government. Also, such TCS would amount to double taxation, they note.

According to the relevant Budget proposal, any overseas remittances, except for education and medical treatment, will attract TCS of 20% regardless of value. Currently, a TCS of 5% is applied on such remittances above Rs 7 lakh. The Budget proposal, experts say, would adversely affect Indian tourists and investors and even the middle-income families. The move could make international tour packages, real estate purchases, investing in stocks and other investments more expensive.

“Raising of the TCS rate is very aggressive for taxpayer where, for example, money is being sent abroad to maintain family member to meet personal expenses or when taxpayer and/or her family is on vacation etc. These are expenditure items and not income. The purpose of introducing the TCS provisions was to keep a check on individuals spending on such transactions without disclosing corresponding income in the returns they file with the tax authorities. The idea was not to use it as a mechanism to collect and refund taxes later,” said Kuldip Kumar, personal tax expert & former national leader – Global Mobility Practice, PwC India.

CBDT chairperson Nitin Gupta told FE the Budget has tried to tighten some provisions and provide relief in other areas. “We have reduced the (highest) surcharge in the new regime. We are finding that there are unnecessary rebates and deductions available. We have not touched the middle income or lower income groups, but only the highest-income group,” he told FE.

Some of the Budget proposals such as taxing insurance policies with premium above Rs 5 lakh and capping deductions for capital gains tax for investing in residential property at Rs 10 crore restrict the avenues for HNIs to earn better after-tax returns. The latter proposal means if a person sells a house and gains over Rs 10 crore, then on investing in another property, the maximum benefit would be limited to Rs 10 crore, beyond which capital gains tax would have to be paid, from assessment year 2024-25. Experts said that this would impact high end residential real estate, especially in metro cities.

A positive aspect of the reduction of the highest surcharge on personal income tax (PIT) from 37% to 25%, officials and some tax experts said, is that it could help limit the flight of HNIs from the country to protect their income. The other measures in the Budget, officials said, are in continuation of the steps taken over the last few years to plug the tax loopholes that the affluent were using for investments.

Amit Maheshwari, Tax Partner, AKM Global said the Budget has brought a mix of tax benefits and restrictions for the HNIs. “Many HNIs used to use the exemption from capital gains tax on investment in a residential house to reduce the tax impact on sales of large properties or shares. The gains on market-linked debentures (MLDs) are now proposed to be taxed as short-term capital gains, at the applicable tax rates,” he said. He noted the instrument is effectively dead now as the tax advantage had gone and are taxed as fixed deposits.

Further, the withdrawal of the exemption on the maturity of the life insurance policies (other than ULIPs) with premium of over Rs 5 lakh in a year will plug the loophole of using insurance disguised as investments by HNIs, he said.

Harshad Chetanwala, Founder of wealth management platform MyWealthGrow said typically, many HNIs prefer the new tax regime because the deductions in the older regime are very low for the levels of income they have. “The reduction in the surcharge is a welcome step,” he said. 

“However, investments in life insurance by HNIs could take a hit following the Budget proposal to tax aggregate premium above Rs 5 lakh. Guaranteed income plans for this segment had become very popular. Depending on the tenure and the income opted for, these plans can give a tax-free return of 6.7% to 7%,” he noted. Chetanwala also said HNIs uses to invest in MLDs as they were taxed on the line of equity investments.

Of the 58.7 million returns filed in Assessment Year 2018-19, just above 4.26 lakh returns were filed by people with income above Rs 50 lakh. Of this, 29,002 returns were filed by people with income above `5 crore, according to official data. The proposed reduction in surcharge will benefit HNIs with income above Rs 5 crore the most. Tax saving gets more elevated when they don’t claim exemptions and deductions as the 30% tax bracket will now kick in after `15 lakh from the previous Rs 10 lakh in the new regime.

According to Kumar, the benefit of use of technology at elevated level by the tax authorities should also flow to the taxpayers as now the government has access to the financial transactions of individuals. The government should consider rolling back the higher rate of TCS and reduce it to 1% as this will put undue cash flow burden on individuals particularly when dollar has become so expensive, he said.

While TCS can be reclaimed while filing income-tax returns, few will be willing to lock in 20% of their investment for months with the exchequer. For example, if one is buying shares worth Rs 10 lakh of Alphabet, the amount that will get locked in, will be Rs 12 lakh. That will be a serious deterrent to investment.

As Nitin Kamath, CEO, Zerodha tweeted on Wednesday: “For retail investors, I guess the only material change in the Budget is for people who invest in international stocks…TCS can be claimed after filing income tax returns at the end of the year, but it’s unlikely that many will be okay with having 20% of capital blocked until then.”

According to him, this will adversely affect all platforms offering international stocks and international crypto exchanges. However, Kamath added that it will not impact Zerodha because they do not offer international stock investing.

Other transactions that will be adversely impacted will be the living costs of Indian students abroad. While the cost of education is out of this tax, living costs that are often met by parents through the liberalised remittance scheme (LRS) route will make these transactions significantly costlier. Currently, the LRS limit is $250,000. That’s not all. Even expenses incurred through credit cards, debit cards and travel cards will come under this ambit. So, any expenses one makes on the foreign trip will lead to TCS.

According to the latest data from the Reserve Bank of India, international travel continued to remain over 50% of the entire outward remittance by Indians under the LRS scheme. In November, outward remittances for international travel touched $1.03 billion, up 2.25 times year-on-year.

After international travel, this route was used for the maintenance of close relatives, followed by gifts and overseas education. According to the RBI data, outward remittance for maintenance of close relatives was $305.35 million in November, followed by $220.90 million on gifts, and $211.65 million for overseas education.  The recent tax changes for HNIs include capping the adjustment of loss from house property against other income during the year to Rs 2 lakh, the surcharge on income tax, taxing the employer’s contribution to provident fund and National Pension System and approved superannuation fund exceeding Rs 7.5 lakh and interest on the excess. Taxing the interest on employee’s own contribution to PF exceeding Rs 2.5 lakh have resulted in more cash outflow for HNIs as taxes.

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First published on: 04-02-2023 at 02:40 IST