Budget 2023: Tax benefits and limitations for HNI’s

HNI means High Net worth Individuals

As per income tax department, individuals who have more than Rs. 50 lakhs of earnings per annum are considered HNIs. (That’s why the IT department collects additional tax as a surcharge.)

UHNIs Ultra High Net Worth Individuals, one who have more than Rs. 5 crore of earnings per annum are considered UHNI.

Changes in New tax regime

It is a well-known fact that the new tax regime offers lower tax rates as compared to the old tax regime. However, the Finance Bill 2023 has increased the benefit for the taxpayer under the new tax regime including certain deductions which were not available earlier, such as: -

The benefit of reduced surcharge to 25% instead of 37% for taxpayers having income above Rs 5 Crores.

The finance minister has proposed to reduce the highest surcharge rate on income above 5 crores from 37% to 25%, which will reduce the Maximum Marginal rate of Tax from 42.74% to 39% of income. This will be applicable only under the new tax regime from 1st April 2023.

This benefit only UHNI’s can get. And who are earning more than 5crore, without further discussion, they can choose a new tax regime.

e.g., Mr. X earning Rs 5,00,00,010.

Let's now look into the changes where the government has increased the tax burden for HNI.

1. Limiting the benefit claimed under Section 54 and 54F: -

The deduction is available on the LTCG arising from the transfer of a residential house if the capital gain is reinvested in a residential house under Section 54. Similarly, in section 54F of the Act, the deduction is available on the LTCG arising from the transfer of any long-term captal asset except a residential house, if the net consideration is reinvested in a residential house. Earlier there was no limit of claiming the benefit under these sections. However, from FY 2023-24, the maximum limit has been imposed for the taxpayer to claim benefits under section 54 and 54F up to rupees ten crores. Therefore, if the cost of the new residential property is more than rupees ten crores, the cost of such an asset shall be deemed to be ten crores.

e.g., 1) Mr. X sold his residential house on April 1, 2023, for Rs.20 crores which was purchased by him 10 years ago for Rs. 8 crores. Mr. X bought a new residential house on May 01, 2023, worth Rs. 12 crores.

Mr. X got 12 crores capital gain and he re-invested in a new residential house but up to 10 crores he can claim the benefit u/s 54 remaining 2crores rupees he has to pay tax.

2. Capital Gain from Investment in Market linked debentures: -

Market Linked Debentures, MLD, are non-convertible debentures where the returns are not fixed but linked to the market. The return on MLD depends upon the performance of the underlying index.

The capital gains on listed MLDs (which are listed in NSE or BSE) are taxed at 10% (Without indexation under) for a holding period of one year or more, on unlisted MLDs (which are not listed in NSE or BSE.) taxed at 20% (without indexation under) for a holding period of 3 years or more. However, from 1 April 2023, both listed and unlisted MLDs will be taxed at slab rate.

Examples:
Listed MLDs: 1) Nhpc Limited 2) Rajasthan Rajya Vidyut Prasaran Nigam Ltd. Unlisted MLDs: 1) Dome Builders & Developers Private Limited 2) Punjab Kashmir Finance Limited

Taxation of the amount received on maturity of Life Insurance Policies: -

Amount received from ULIPs (unit linked insurance plan) having premium payable exceeding Rs 2,50,000/- are already taxable. The Union Budget, 2023 has further taxed income from insurance policies (other than ULIP) having premium or aggregate of premium above Rs 5,00,000 in a year. This income shall be taxable under the head "income from other sources".

Rationalisation of exempt income under life insurance policy

We all know that the cause (10D) of section 10- Income tax exemption on sum received under life insurance policy provided premium payable on such policy should not exceed 10 percent of actual capital sum assured.

But several taxpayers are misusing the exemption by investing in policies having large premium contribution and thereafter claiming exemption on sum received under life insurance policies. In order to prevent misuse, it is proposed to tax on sum received from Life insurance policies having premium or aggregate premium exceeding above Rs 5,00,000 in a year. This income shall be taxable under the head "income from other sources".

E.g.,

Note: please refer to the table as per name.

• Mr. X has only one insurance policy and an annual premium not exceeding Rs 5,00,000, so it is exempt.
• Mr. Y has only one insurance policy, and the annual premium is more than Rs 5,00,000, so it is taxable.
• Mr. Z has 2 insurance policies; one is already worth more than Rs 5,00,000. He can get an exemption on this. But he already crossed the limit; after that, if he has any insurance policy, it will be taxable.