February 1, 2023
1. Market Linked Debentures (MLD) – Tax ambiguity plugged
MLD instruments were increasingly becoming popular as there was ambiguity in the tax regime and due to some technicalities built in their structure, they were enjoying a LTCG tax at 10% despite practically being a debt instrument. This led to a strong push in the industry by multiple investment houses coming out with new issuances with attractive post tax returns all being promoted due to this minor difference between a plain vanilla debt and MLD instrument.
We, at Tailwind a digital wealth management platform, recognising the ambiguity and impact that might arise in case of an adverse view – have stayed away from the hype around MLD and accordingly till date have 0 exposure in any such instrument.
In today’s budget announcement, importantly, the Finance Minister has plugged this gap. Finance Bill 2023, adds a separate definition for MLDs to recognise the instrument and categorises all gains from sale / maturity of MLDs as ‘Short Term Capital Gain’. Implying the gains would be subject to taxation as per individual’s tax slabs from 1st April 2023 onwards.
Accordingly, investors holding MLD instruments which mature in FY23-24 or later would now have to bear a higher tax incidence impacting their net returns. For instance, for an investor in 30% tax bracket, holding a MLD yielding 10% p.a., earlier net of tax returns would have been 9% which will now come down to 7% p.a.
2. Surcharge reprieve for Ultra High Networth Individuals (UHNIs) as well as Category III AIFs
With the introduction of higher surcharge on taxable incomes over INR 2 crores and INR 5 crores, the maximum marginal rates had gone up to 42.7%. With the latest budget announcement, this has been brought down to 39% as the highest surcharge slab is reduced from 37% to 25%.
Accordingly, investors in fixed income as well as Category III AIFs (investing in Long Short Funds or other derivative related strategies) will be benefit from this move. As an illustration for a 10% gross return, an additional ~35 bps higher post returns gains would be seen by these investors.
3. Small Saving Schemes
Promoting secured investment options for small savers, senior citizens and women, the budget made three announcements. Firstly, for Senior Citizens Savings Scheme, the investment limit has been increased from INR 15 lakhs to INR 30 lakhs for a secured investment that currently earns 8% interest rate.
For small savings through post office under monthly income account scheme, the limit was doubled from INR 4.5 lakhs to 9 lakhs for single account holders and increased from INR 9 lakhs to INR 15 lakhs for joint account holders.
Further, another small savings scheme focused on women has been announced ‘Mahila Samman Savings Certificate’ which accepts upto INR 2 lakhs at an interest rate of 7.5% for 2 years.
4. Limiting tax concessions on investments through Insurance
In another important measure to plug tax concessions and target them better, the budget introduced provisions to limit tax exemption to ULIP and life insurance policies where aggregate premium payable is upto INR 5 lakhs except in case sum received on death of a person.
5. Ceiling on deductions from capital gains on investment in residential house
The budget has put in place an upper limit of INR 10 crores under sections 54 and 54F for deductions taken by way of investment in residential house property.
6. Distribution from InvIT / REITs
Income from REITs & InvITs was being distributed as interest, dividend, rental and in some cases as repayment of debt. In case of the later, repayment of debt, was not covered under income tax as of now and hence was not being taxed. Same is now plugged to tax any distribution being repayment of debt to be taxed in the hands of unitholder.
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