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Budget 2023: The Changes that Matter, from Insurance to Taxes and MLDs


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.

Firstly, what didn’t change in #Budget2023

We expected a bunch of changes but a few things that stood out simply because they didn’t happen:

  • No changes in Equity Capital Gains slabs or rates: Gains from stock market transactions in shares will not see any changes. That is, short term gains are at 15% for less than a year of holding and long term gains are at 10% for greater than a year. (Rs. 1 lakh is still tax free for long term gains)
  • No changes in mutual fund taxation: Mutual funds continue to be taxed the same – debt or equity. That’s equity level taxation for equity funds, and debt level taxation for others (3 years+ = 20% with indexation, less than 3 years is just added to income).
  • No increase in 80C limits: The limits on 80C exemptions are still restricted to Rs. 1.5 lakh per  year.
  • No increase in housing loan interest limits: Earlier home loan interest exemption limits (Rs 2 to 2.5 lakh per year) haven’t been changed.

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.

Going abroad? Buying US stocks? Tax of 20% at source (TCS)

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.

Don’t buy Market Linked Debentures: Tax arbitrage is gone

Recently, a number of market linked debentures have been sold to individuals on the premise that:

  • Listed MLDs have a much lower tax at 10% after a year of holding
  • You can get better tax-adjusted debt style returns using MLDs which could otherwise attract between 30% to 43% tax.

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:

  • All MLDs, listed or otherwise, will be taxed as short term capital gains, at redemption or sale, even if it’s after 1 year (any time period)
  • The capital gains are classified as debt (not equity, even if the MLD is equity based)
  • There is no indexation at all.
  • Short Term Capital Gain is added to income, so you are taxed on the gain at the highest marginal rate

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.

Tax will be deducted at source for all listed debentures

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.

Insurance policies: More that 5 lakh premium? Don’t buy them

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.

Big real estate whammy: Can only park 10 cr. worth gains in a house

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.

Housing double tax exemption benefit taken out

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.

REITs and InvITs: Some tax advantages removed

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:

  • they pay dividends to the trust, which will distribute them to unit holders (taxable)
  • they pay interest on debt taken from the trust, which again is given to unit holders (taxable)
  • they return the principal on the debt taken from the trust, which when distributed is not taxable for unit holders.

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.

Income more than 5 cr. per year? Move to the new regime

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.)

Senior Citizens: Get 60 lakh worth of “better” interest rates with SCSS

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.

Presumptive taxation limits hiked: Good for consulting and business income

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 New Regime: Upto 7 lakh is tax free, slabs rejigged

The old regime tax slabs remain the same (30% starts at 10 lakh+) but the new regime has a modified set of slabs:

  • Upto 3 lakh: no tax
  • 3-6 lakh: 5%
  • 6-9 lakh : 10%
  • 9-12 lakh: 15%
  • 12-15 lakh: 20%
  • More than 15 lakh: 30%

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.

The Real Budget: What’s the government doing?

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:

  • A massive increase in capital expenditure to 13 lakh crore. Defence gets nearly 6 lakh crores, and the Rail and Road ministries get nearly 2.5 lakh crore each.
  • The food subsidy is down 30% in the next year to only Rs. 200,000 cr. This is actually quite good for us as this has been a thorn in our financial side.
  • Fertilizer subsidies, which spiked up to 2.25 lakh crore in the current year due to the Ukraine crisis, is also down to 1.75 lakh cr. Again, this is bettter for us.
  • An interesting policy for technology: we get AI centers in educational institutes, a private industry participation for Digi locker to share documents and courses for coding, AI, robotics etc. under a skill development programme.
  • We also get a National Financial Information Registry. This will help promote financial inclusion and perhaps centralize any complaints in the financial ecosystem, currently fragmented under many regulators.
  • The government has reduced customs duty on a lot of raw materials, while keeping them high on finished goods. Cars become more expensive when imported, but parts are cheaper. LCD panel parts are lower in duty, but imported TVs have high duty. This might help balance out the needs for manufacturing locally, versus the earlier approach of raising import duty on everything.
  • There are substantially lower subsidies. For example, the job-guarantee scheme, MGNREGA, sees a 30% cut in budget from last year’s 78,000 cr. down to 60,000 cr. This, when there are elections in 2024, is commendable.
  • The fiscal deficit will be brought down to 4.5% in three  years, if things go well. That requires a lot of kool-aid, we know.
  • There seems to be solid agricultural initiatives: A horticulture plant initiatives, an agri-accelerator fund for startups, a “Sree Anna” program to promote Millet exports and so on. Alongside, the push is to add 20% more credit to the agri sector from banks, to 18 lakh crores.

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.

What’s the verdict?

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:

  • Capex at government level of Rs. 13 lakh crore+. This is 30% higher than the previous year.
  • Massive increases in the Defence, Railways and Road infrastructure allocations – just these add up to Rs. 10 lakh crore.
  • A relatively low borrowing (net) of only Rs. 11 lakh crore. We would have expected a lot more.
  • A managed fiscal deficit that is far better as a number compared to much of the west.

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.

Watch on Youtube

Catch us on youtube as we de-code the budget for you with detailed commentary.


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