Finance Minister Nirmala Sitharaman announced a reduction in personal tax rates for high net-worth individuals. But, in contrast has plugged in certain tax avoidance options.
By reducing the highest surcharge rate from 37% to 25% in the new tax regime, the highest tax rate for all individuals with an income of Rs 5 crore or more-HNIs-has been reduced from current 42.74% levels to 39%.
Thus, for an individual earning an income of Rs 10 crore, the tax outgo would now be Rs 3.9 crore instead of Rs 4.27 crore earlier, resulting in a tax saving of Rs 37 lakh.
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However, the government on the flip side, has plugged in the tax avoidance options available with the HNIs in this Union Budget.
Market-linked debentures
High-value insurance policies
were the two devices predominantly used by those in the highest tax bracket. These are now being rationalised.
In case of market-linked debentures, the taxation changes announced today eliminate the tax arbitrage enjoyed by uber-rich investors holding them. The income from sale of such debentures will now be taxed under short-term capital gains as opposed to lower long-term capital gain taxes.
For high-value insurance policies or a cumulative policy premium outgo exceeding Rs 5 lakh, the government has proposed to tax the payout on such policies except in case of death of the policyholder.
So, on an overall basis, there may not be a net reduction in the tax outgo of HNIs, it may just be a reduction from a high marginal rate inducing certain avoidance devices with now fewer opportunities to avoid.
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