Blog

Union Budget 2023 presented earlier this month has been widely hailed as a high-quality growth-oriented policy statement. Now that the big-ticket items have been thoroughly discussed and analysed, it is time we look at those innocuous clauses hidden within the 60 pages of the finance minister’s speech and the accompanying annexures.

The Budget proposes interesting provisions that herald a paradigm shift in the governance of personal finances.

New tax regime

One of the most important changes in the Budget was to make the new tax regime as the default provision. It signifies an important change in our approach to personal income tax and throws light on simplification, removal of exemptions, absence of state-directed investments, and elimination of loopholes to prevent evasion.

For instance, the tax law provides for a deduction on housing loan interest. When the property is sold, the law allows the taxpayers to deduct the property cost/indexed cost—where one could arguably factor in the housing loan interest—from the net sale proceeds to calculate the gains. The Budget proposes to change the law to prevent such double deductions.

The proposal to lower tax rates in the new tax regime is a way for the government to nudge the workforce to leave the old tax regime. The latter offers tax-saving instruments directing and incentivising individuals to save tax through certain measures. It is quite likely that the old tax regime will see no changes and will die a natural death in the next few years, and the new tax regime will be updated by lowering tax rates or easing the tax slabs or both.

The maximum surcharge on income tax for the highest income earning cohort will reduce from about 42.7% to about 39% and will benefit the richest Indian. This marks a significant milestone in our journey from a socialist society where poverty was romanticised and rich was evil to a robust market-led economy.

Digital push

There are plans to simplify the KYC using digital India platforms and to adopt a ‘risk-based’ approach instead of a ‘one size fits all’ approach. Leveraging DigiLocker as a one-stop solution for reconciliation and updating the identity and address of individuals, and a common IT returns form also fits into the overall change towards simplification, convenience, and trust.

The government is also pushing for financial inclusion with the creation of the National Financial Information Registry credit growth.

Tax exemptions

Currently, taxpayers can claim exemption on long-term capital gains by reinvesting in residential property. The Budget proposes to put a cap on the value of property reinvestment at Rs 10 crore. While this impacts the rich, it shows the signs of a fundamental shift—a move towards cleaning up unaccounted money from the real estate sector. This reduces opportunities to launder money through the purchase and sale of real estate.

Provisions on presumptive income tax, benefits for self-employed professionals, and taxation on leave encashment add to the government’s efforts of raising the income of citizens.

Union Budget 2023 proposes to remove the tax exemption on income from life insurance (LI) policies (other than ULIP) where the aggregate premium is above Rs 5 lakh—without affecting the tax exemption provided to the amount received on the death of the person insured. This change marks the end of tax arbitrage available to high-net-worth individuals in using traditional LI policies as a vehicle for long-term debt investments. This will lead to the rectification of product and purpose mismatch.

This is also an opportunity for LI companies to repivot their portfolios from tax-beneficial savings to risk pooling covering mortality and longevity risks. Term plans and annuities, which are fundamentally life insurance products, will gain favour since the risk-return will be aligned and tax benefits will phase out. Currently, benefits on death payout are not taxable and annuity income in the hands of annuitants is taxed.

With the government pulling away from directing citizens on where to invest—which was incentivised by tax sops֫—going forward, the focus will be on making young individuals become financially aware, understand their risk appetite, and plan their financial roadway. It will become imperative for people to understand the risk-return tradeoffs, understand their unique cash flow situation, the financial instruments on offer, and how these could help individuals make a financial plan with the least amount of cash flow mismatch, tax implications, and which matches their risk profile.

As these changes play out, financial planning as a professional service will gain momentum. Portfolio advisory and financial planning may become akin to tax filing where you pay a percentage of AUM and align objectives, understand options, and either invest on your own or have an intermediary do it.

These gentle changes are going to contribute to India’s evolution as a modern economy and we should welcome and adapt to benefit from these wheels of change.

(Manavendra Prasad works in the public policy space and has previously worked with banks, mutual funds, and wealth management companies. Gouri Gupta has led the product management function in life insurance, wealth management, and portfolio management companies.)