[Opinion] Finance Bill 2023 – An attempt to rationalize individual taxation regime

Authored by Maneesh Bawa – Executive Director, Bavneet Kaur Nanda – Senior Associate | Nangia Andersen India

Ending all anticipations, the Hon’ble Finance Minister (FM) Nirmala Sitharaman presented the Union Budget 2023 last week. This being the last full budget before the upcoming elections was eyed upon by all taxpayers especially in the non-corporate category. While there was not much to offer in the corporate categories, the individuals could bag on to some incentives. It was probably to keep the buzz going that the FM twisted her speech in this current budget and unveiled the direct tax amendments at the end of her speech.

The proposals for individual category taxpayers have had mixed reactions hovering around the community. The Government has proposed to make the revised new tax regime (RNTR) (section 115BAC of the Act) to be the default regime of taxation, whilst leaving taxpayers in the old tax regime (OTR) in a state of dismal. While standard deduction has been introduced in the RNTR along with increase of minimum exempt threshold limit, no additional benefit has been passed on to the taxpayers making tax saving investments under the OTR. This move of making the RNTR more attractive to the taxpayers clearly reflects the Government’s intention to eventually phase out the OTR.

Every change comes with its own pros and cons. The post pandemic era has seen an increase in medical insurance premia and expenditures for the public at large. Also, it is less likely that people would reduce their expenditures towards medical and life insurance premia thus, not catering to this aspect has definitely brought disappointment amongst taxpayers.

The RNTR would mean being subject to lower rates of income tax at the cost of foregoing many exemptions/deductions. This regime is focused on small taxpayers who do not intend to make investments in tax saving instruments and look for cash liquidity.
Tax saving investments, however, lay a foundation of lifelong saving and financial security habit amongst individuals without which the youth may end up not saving at all. Taxpayers in the medium income group who are in the habit of making tax saving investments such as life insurance and/or medical policies or who receive house rent allowance from their employers and pay rent for their accommodation or claim deduction of interest in housing loans etc. may want to opt for the OTR because of the tax benefits available after considering available exemptions/deductions.

The RNTR may find popularity amongst the High Net-worth Individuals (HNIs) because of the drop in the rate of surcharge. The HNI taxpayers falling in the income group beyond Rs. 5 crores may end up saving tax because of drop in the rate of surcharge but that would also depend upon the deductions and/or exemptions considered by them while computing their income. However, overall this budget has been a mixed bag for the HNIs. The Government has tried to plug the loopholes in the existing provisions of the Act which were largely benefiting the HNI taxpayers.

The roll over benefit claimed under sections 54 & 54F of the Act has been limited to Rs. 10 Crores. This would simply mean if cost of the new house property purchased to claim exemption of capital gains is more than Rs. 10 Crores, then the cost of such asset will be deemed to be Rs. 10Crores. The Government is of the view that HNIs have been taking undue advantage of exemption in the case of sums received from high value premia life insurance policies. To curb this misuse income from insurance policies having premium or aggregate of premium above Rs. 5,00,000 in a year shall now be taxable as “Income from Other Sources”. Increasing the tax collection rates from 5% to 20% under Liberalised Remittance Scheme (LRS) and taxing of market linked debentures at normal slab rates as short term capital gains are measures to limit tax advantages of special interests to HNIs.

While the Revenue Secretary in a recently published interview mentioned that the Government is confident that 50% of the taxpayers will shift to the RNTR, it shall be interesting to see how the proposed changes in the budget are adopted by the taxpayers. There can be no blanket rule as such as to who may benefit of the RNTR at large and will purely depend on the quantum of the tax saving investments made by each taxpayer.