- Wealth PMS (50L+)
The most important things in the Budget 2023 are usually about taxation changes. And we’ll summarize what’s most important for you right here.
We expected a bunch of changes but a few things that stood out simply because they didn’t happen:
Some of this is good and as equity investors, we are happy to not see higher rates for equity capital gains. Here’s a bunch of other, meaningful changes in the budget.
Many of us travel abroad and instead of carrying cash we might choose to use a credit or debit card. Startups like Niyo allowed for better exchange rates for using their card too. Every transaction on a debit card would see a 5% tax-collected-at-source (TCS) and if you didn’t spend Rs. 7 lakh in the year, you would get the TCS back. The seven lakh threshold allowed for small payments without the need to keep TCS collected. Otherwise, you could still claim the TCS as if it was tax paid in advance, and either claim it as a refund or adjust it against other tax payable.
From 1 July 2023, the TCS is increased to 20% with no threshold. That means every dollar (or any currency) spent abroad has a 20% extra amount that’s collected at source. You can then adjust it against other tax payable, or claim it as a refund at the end of the year.
This hurts all companies that buy services from abroad through cards, which will now have a 20% higher cash flow. (The claim-back may take a long time) It will also hurt individuals travelling abroad – in fact, if you don’t want the cash flow hit, you might as well buy currency notes in India before you go abroad.
Note that many of you may invest abroad in startups through vehicles which you fund through LRS. 20% tax will be additionally withheld for all such investments too.
Recently, a number of market linked debentures have been sold to individuals on the premise that:
See our article: How do Market Linked Debentures work?
This arbitrage is now gone. In Budget 2023, a new rule has been introduced that does this:
This applies to even MLDs that you hold today and which are sold or mature after 1 April 2023. The way to approach this is: Sell these MLDs immediately, if possible, to get the tax benefit as it applies today.
Interest paid on listed debentures will now attract 10% TDS, which means you will receive less cash flow starting 1 April 2023 than earlier. This is not a big problem since this income was taxable anyhow, but many people got away without declaring this income. Now, you will see some TDS deducted before you receive interest.
Note that this doesn’t apply to any withdrawal plans from mutual funds, so you should consider switching to mutual funds for some of your longer term bond investments.
After April 1, 2023, any insurance policy (even non-ULIPs) that are issued, where the premium is more than 5 lakh per year, is now terrible on taxation. If the policy pays out money when you’re alive, then the entire proceeds, minus the premium paid, is considered taxable as income. Not even capital gain, just income – taxed at marginal rates.
And this applies even if you have more the only policy where the premium adds up to more than Rs. 5 lakh per year. (Don’t count any policies issued before April 1, 2023, they are fully exempt).
This is lousy for the insurance industry, because they’ve recently been selling insurance policies with 7% “guaranteed” returns, and saying that the entire 7% is post-tax. After April 1, it will be fully taxed, and the return is no longer as attractive. So don’t buy such policies then.
But since the new rules apply only for policies issued after April 1, you will be bombarded by Insurance companies selling you these products in the next two months. It’s fair; they’re giving you a nice tax-arbitraged product, and you benefit from it. But it won’t last too long, and the party looks to be rough.
All life insurance stocks fell today, because most private insurers have such products for the most part. However, the public sector giant, LIC (Disclosure: we have a position) fell dramatically too, even though such products are not a large part of their selling process. (And indeed, most of their customers pay much lower premiums)
As an aside: Planning long term investments with taxes in mind seems like a bad idea.
Currently, any capital gains – in stocks, gold, real estate or even startups – can be invested in a residential house. Any amount qualifies. Even 500 crores. But the policy wasn’t created to encourage the super rich to buy ultra-expensive houses – it was done to encourage housing.
So the rule’s changed: Only Rs. 10 cr. worth of gains can be parked in a residential house. You can buy a more expensive house with capital gains proceeds, but only 10 cr. will be tax free. On the rest, you have to pay whatever capital gains tax is applicable.
This also applies if you own a very expensive house and you want to sell it and buy another very expensive house. Only 10 cr. worth capital gains can be offset in buying the new house.
In effect, this will drive more money into capital markets eventually. You can’t buy insurance, you can’t buy real estate with gains, and you can’t take on MLDs – where else do you invest? The answer: either equity or fixed income, through mutual funds or directly. Over time, the market will benefit.
If you took a house using a loan, then the interest paid – or part of it – can be reduced from your income as tax (and you can even claim a loss from house property).
When you sell that house, you can take the entire interest – regardless of whether if was used for a tax exemption earlier – and use it as a cost to reduce your actual capital gains realised.
Since this is a double advantage, Budget 2023 has addressed it by saying: use one of the two. If you’ve claimed an exemption for the interest, it can’t be used as a cost to reduce your capital gains. Net negative for the real estate industry.
Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) are collective investment vehicles that either own commercial rent-generating real estate or infrastructure projects. The cash flow from these projects typically comes in three types:
The last bit – where principal is returned to unit holders and isn’t taxed – has now been changed. From April 1, 2023, any sort of income received from an REIT or InvIT is fully taxable in the hands of unit holders.
The highest tax rate for an individual is currently 42.74% – which is for incomes greater than Rs. 5 cr. per year.
In Budget 2023, if you make that much, you can pay a lower 39% rate at the highest slab. This only applies if you choose the “new” tax regime, which takes away any exemptions from your tax returns. At a 5 cr.+ income, you probably don’t have too many exemptions to write home about, so you might as well choose the new regime anyhow.
(Note that dividends are only taxed at 35%, even if you make more than 5 cr. worth. That’s a caveat to this rule.)
The Senior Citizens’ Savings Scheme (SCSS) is a good place for people aged 60 or more to park money for fixed income investments. SCSS earns 8% currently. That means a senior couple can park Rs. 60 lakh and earn a pre-tax interest of Rs. 4.8 lakh (and if that’s all they make, its entirely non-taxable). That’s Rs. 40,000 per month which is fairly decent for a person to live on, and there’s hardly other “safe” avenues at this interest rate.
If you’re planning for your parents or if you’re retiring soon, this might be a way to park money (for five years) to get a decent return. At inflation of 5.7%, the SCSS gives a very good real return.
If you’re a consultant or a small business, you could “presume” income at lower levels of turnover. Service businesses (doctors etc) could just show 50% of earnings as taxable income, and trading or other businesses could show 6% to 8% as effective income. The idea of such “presumptive” income is to lower tax filing burdens and yet have tax compliance.
The limits were 50 lakh for individuals and 2 cr. turnover for MSMEs to cover such presumptive income. These have been increased to 75 lakh for individuals, and 3 cr. for MSMEs.
It’s actually more lucrative to be a consultant than an employee, speaking tax-wise.
The old regime tax slabs remain the same (30% starts at 10 lakh+) but the new regime has a modified set of slabs:
with the caveat that if the total income is under Rs. 7 lakh, no tax applies.
This effectively means that if you earn, say, Rs. 15 lakh without exemptions, you will need roughly 4 lakh rupees worth exemptions (HRA, 80C etc. ) otherwise the new regime is better for you. They’re making the new regime slighly more attractive each year, and eventually we should consider that exemptions will no longer be meaningful.
There are some incredibly good initiatives in the budget. Now, usually, the budget says all sorts of nice things that have no connection with what actually happens. In Hindi, they say ummeed pe duniya kaayam hai, (the world runs on hope) so we will drink a little kool-aid and hope the great things come to be:
The structure of the budget seems to be more towards investment and capacity building rather than doles. This is useful as we have some buffers now, as tax collections were better than expected last year. We collected 25% more than expected! With greater compliance, tax collections should ease the requirement of the government to borrow. The less that the government borrows, the more that the private sector can to scale up private investment and capex. This is theory, of course, but a budget is, for the most part, a theoretical statement. We can’t expect a “static” year when none of this will change, but the plans, if they come true, hold hope for a stronger government financial position in the future.
People only care about how the budget impacts them, and that seems to be a net negative for the relatively affluent. But it does mean that many of the tax arbitrages are gone now, and we should consider longer term investments as they truly perform. What is truly positive is what isn’t in the “personal” part of the budget:
The numbers seem to make for a relatively stronger India as a country, although the tax niggles hurt some of us. In capital markets, though, the first reaction is usually knee-jerk, so stock markets have corrected a bit. Over time, as the government actually clarifies and pushes this through, we should see markets cheer a budget that focusses on building infrastructure rather than doling out subsidies. Given our expectations of higher taxation for equity transactions and a much higher subsidy pool considering oncoming elections, the budget has had no major negative surprises. A lack of a negative is a positive, and the capex increase adds to the optimism, and lets us say this: Good for the economy.
Catch us on youtube as we de-code the budget for you with detailed commentary.