The Union Budget 2023 has brought some significant changes that will impact the lives of High Net Worth Individuals (HNIs). In this blog, we will take a closer look at these changes, and share our thoughts on how they could impact you.

More Benefits for Higher Earners: Reduced Peak Rate Surcharge

The budget has introduced several modifications to the Personal Income Tax structure. Here are the key highlights:

Increased tax rebate: The income tax rebate has been increased from Rs 5 lakh to Rs 7 lakh, meaning those earning up to Rs 7 lakh will be exempt from paying tax.

Increased basic exemption threshold: The basic exemption threshold has been increased from Rs 2.5 lakh to Rs 3 lakh.

Reduced number of tax slabs: The number of tax slabs has been reduced from six to five, with the tax rate being 5% on income between Rs 3-6 lakh, 10% on income between Rs. 6-9 lakh, 15% on income between Rs. 9-12 lakh, 20% on income between Rs. 12-15 lakh, and 30% for those earning more than Rs 15 lakh.

Standard deduction: The budget has introduced a standard deduction of Rs 52,500 for salaried workers and seniors.

Reduced peak rate surcharge: The surcharge in the highest tax bracket has been reduced from 37% to 25%.

It’s important to note that all these announcements are for the new tax regime and do not include the Section 80 or other deductions. The new tax regime may have lower tax rates, but individuals will have to weigh the cost and benefit before deciding which regime to go for.

Insurance Changes: Impact on Traditional Policies and Term Plans

The budget has proposed changes to the tax exemptions for traditional insurance policies. Here are the key points:

Exemptions removed for premium beyond 5 Lakhs: Income will not be exempt if the aggregate premium for life insurance policies (excluding Unit-Linked Insurance Plans) exceeds Rs 5 lakh.

No effect on insurance policies issued before March 31, 2023: This announcement will not impact insurance policies issued before March 31, 2023.

Emphasis on term plans and pure risk covers: This change will reduce the desire to purchase high-value traditional insurance and increase the emphasis on term plans and pure risk covers.

A Secure Retirement Plan: Increased Deposit Limit for SCSS

The government has increased the maximum deposit limit under the Senior Citizen Savings Scheme (SCSS) from Rs 15 lakh to Rs 30 lakh, providing senior citizens with a greater opportunity to earn a regular income. With an interest rate of 8.0% p.a. and a 5-year maturity period, SCSS is a favourable investment option for retirees seeking a risk-averse investment.

Investing in SCSS also offers tax benefits, with a deduction of up to Rs 1.50 lakh (from Gross Total Income) available under Section 80C of the Income Tax Act, 1961. The interest earned is taxable as per your income tax slab, but tax at source can be avoided by furnishing Form 15H/15G if the accrued interest earned is less than Rs 50,000 per financial year.

Encouraging the Financialization of Gold Holdings in India

The government has taken a step towards the financialization of gold holdings in India, which is the second largest consumer of gold. To promote a more secure and smarter way of holding gold, the conversion of physical gold to Electronic Gold receipts and vice versa has been proposed to not be treated as a ‘transfer,’ thereby avoiding capital gains tax.
However, the finance minister has proposed to increase the customs duty on gold, making physical gold more expensive, which will likely promote the culture of holding gold in a more secure and tax-efficient

Making the Most of the Budget

From a financial advisor’s point of view, these announcements show a positive trend in the direction of simplifying the tax structure and promoting investment in different financial instruments. The increase in the tax rebate and basic exemption threshold will benefit the lower-middle-class taxpayers and encourage them to save more. The reduced peak rate surcharge will also benefit the higher-income taxpayers. The emphasis on term plans and pure risk covers will help individuals to plan for their long-term financial security. The increased deposit limit under SCSS provides a good opportunity for retirees to earn a regular source of interest income while complementing their investment and tax planning. The financialization of gold holdings is a step in the right direction to promote a more secure and efficient way of holding gold.

However, it is important to note that the success of these announcements will largely depend on the execution and qualitative parameters. A personal financial plan and regular review of the same will help individuals to take full advantage of these announcements and achieve their financial goals.