High Net-Worth Individual, popularly known as HNI, is not defined anywhere, but in common parlance generally refers to a class of individuals who have investments of more than There is a qualified surplus. Net worth of 5 crores or more 25 crores. If we look at the Income Tax provisions, then by Assessment Year (AY) 2023-24, individuals earning total taxable income of above 5 crores were subject to a brutal tax rate of 42.74%. As the Finance Minister pointed out in his budget speech, it is the highest in the world. To make the Indian tax regime more competitive, surcharge is applicable for individuals whose gross taxable income is higher 5 crore has been reduced from 37% to 25% under the new tax regime. The change brings down the top tax rate to a more attractive 39%. However, before HNIs rejoice, here are some other amendments proposed in the budget that may increase their tax liability significantly.
Limitation of benefits claimed under section 54 and 54F
The existing provisions of section 54 and section 54F of the Income-tax Act allow deduction on capital gain arising from transfer of a qualified long-term capital asset if an assessee, within one year of the transfer or two years after the date of transfer, is in India. purchased a residential unit, or constructed a residential unit in India within a period of three years after that date.
As per section 54 of the Act, deduction is available on long-term capital gain arising from transfer of a residential house if the capital gain is reinvested in a new residential house. And section 54F of the Act, provides deduction on long-term capital gain arising from transfer of eligible long-term capital asset other than a residential house, if the net consideration is reinvested in a new residential house.
However, it is proposed to limit the maximum deduction that can be claimed under section 54 and 54F with effect from 1 April 2024 100 million. This means that where a person sells a qualifying long-term capital asset on which their gain arises 10 crores and if such person reinvests the entire consideration for purchasing a new residential unit; Where earlier the entire capital gains amount was exempt from tax, from assessment year 2024-25, gains only up to 10 crores will be exempted under the provisions of section 54 and 54F. remaining capital gains, ie above 10 crores, will now be taxed at a flat rate of 20% (with indexation). It may be noted that the maximum surcharge applicable on income from capital gains is limited to 15% under both the old regime and the new tax regime.
Higher capital gains on market linked debentures
Market-Linked Debentures (MLD) are instruments that provide fixed returns to investors based on the performance of an underlying market index. MLDs are popular investment instruments for HNIs as they offer a stable rate of return with low risk (similar to loans), but unlike interest on loans, which are taxable at slab rates, 10% on gains on maturity of MLDs was taxed at a flat rate of Rs. As equity under section 112A of the Act (holding period exceeding 12 months).
It is proposed to insert a new section 50AA of the Act for taxation of MLD. Under this section, with effect from April 1, 2024, the full value of the consideration received or acquired as a result of transfer or redemption or maturity of such instruments shall be treated as short-term capital gain and shall be taxable at the applicable slab rates. It is to be noted that even if the MLD is received before April 1, 2024, the provisions of section 50AA of the Act will apply where the transfer or redemption or maturity occurs after April 1, 2024. Also, no deduction will be allowed. In computing the income chargeable to tax of any sum paid on account of securities transaction tax. However, the cost of acquisition of debentures and any other expenditure incurred wholly and exclusively in connection with such transfer/redemption/maturity shall be allowed as deduction.
The above amendments along with increase in rate of TCS (Tax Collected at Source) from 5% to 20% on foreign tour packages and other remittances under LRS will definitely increase the tax burden on HNIs. Looking at the recent amendments proposed in the last few budgets, there is a clear indication that the revenue authorities aim to withdraw all tax incentives applicable to HNIs and what they believe to be a fair and equitable tax from such individuals.
Neeraj Agarwal is a partner at Nangia Andersen LLP. Neetu Brahma contributed to this article.
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