- The Treasury Secretary lowered the maximum tax rate and that will encourage HNIs and UHNIs to invest more.
- Domestic and global AIFs based in GIFT City are also likely to benefit from the budget’s tax incentives, Crisil said.
- Imported luxury cars and international travel will become expensive and the withdrawal of capital gains from the sale of luxury homes will also be limited.
The 2023-24 Union budget is being hailed as the household of the common man, but at the same time, many different announcements could make things a little difficult for high net worth and ultra high net worth individuals (HNIs and UHNIs) in the coming year.
First the positives: Finance Minister Nirmala Sitharaman has acknowledged that the country’s highest tax rate of 42.74% is also the highest in the world. This is for those earning over ₹5 crore annually. It lowered the top tax rate to 39% by lowering the levy. The move, Crisil says, will encourage HNIs and UHNIs – which have over £5bn and £25bn of investable surplus respectively – to invest more.
“The reduction in the surcharge on the top tax bracket and its impact on lower tax incidence for individuals in the class is expected to increase their desire to invest in alternative investment funds (AIFs), portfolio management services and other alternative investment products. According to a report by the rating agency Crisil on the budgetary impact.
AIFs and family offices should also benefit from the measures for start-ups announced in the budget – extension of the start-up period and loss carryforward. It enables the entire ecosystem of startups and the investor community.
“Domestic and global AIFs domiciled in GIFT City are also expected to benefit from the budget’s tax incentives,” said Crisil.
Last year, nine out of ten UHNIs from India were able to increase their wealth despite the Russia-Ukraine conflict, rising interest rates and inflation. In fact, 35% of them saw their wealth grow by more than 10%, according to a Knight Frank report, and they were confident it would continue to grow in 2023. At 34%, equities made up the bulk of the UHNI portfolio out of 2022, according to the report.
Importing cars and traveling abroad will be more expensive
And now for the not-so-good news for the HNIs and UHNIs. Taking money abroad was complicated because all international transfers – except for student loans and medical reasons – are subject to a 20% withholding tax (TCS). This affects investments abroad, which are taxed at 20% without a threshold.
Travel abroad is also becoming more expensive. “One budget proposal that will negatively impact the industry is to increase the TCS mandate from 5% to 20% for outbound travel packages. Not only will this increase pre-payment drain for customers, but it will also give overseas-based online travel booking platforms an unfair advantage over India-based travel agents and tour operators,” said Rajesh Magow, Co-Founder and Group CEO of MakeMyTrip.
Luxury cars, another popular asset class that India’s rich and super-rich are interested in, will also become expensive. The 2023-24 budget increased tariffs on these imported cars – affecting those who love Lamborghinis, Mustangs, Ferraris and more. The FM increased the tariff from 60% to 70%.
“It is highly unlikely that the measures imposed on the automotive industry with increased tariffs will have an impact on the entry-level luxury vehicle segment,” said Sumit Garg, co-founder and CEO of Luxury Ride. Final models from Mercedes, Land Rover, Porsche and Aston Martin with a displacement of more than 3,000 cc have to shell out more.
REITs and luxury real estate
The FM has also proposed capping section 54 and 54F capital gains deductions on house investments at £10m.
“Essentially this means that if you sell a house and the profits are in excess of £10million, the maximum profit you can claim is up to £10million if you invest in another property. Capital gains over 10 crore are now taxed. This is a disadvantage for this segment as there was no such cap before,” said Anuj Puri, chairman of Anarock Group, an investment consultancy.
According to Knight Frank’s report, UHNIs are particularly fond of buying homes, and India’s super-rich own an average of 5.1 homes – more than their global counterparts. Additionally, about 14% of UHNIs bought a home in 2022, and about 10% are expected to buy a new home in 2023. If they actually do this, they would have to add its resale value to the control in the new fiscal year.
However, the report states that India’s investment in real estate by the super-rich goes beyond residential real estate. A significant portion of UHNI assets – up to 25% – were allocated to commercial real estate in 2022, either directly through ownership or indirectly through funds. This includes directly in the form of assets and indirectly through funds and REITs or real estate investment trusts.
It may appear that some of these investments will need to be recalibrated in line with budget proposals – income distributed through the redemption of shares by corporate foundations such as REITs and InvITs or infrastructure investment trusts will need to be taxed in the hands of shareholders.
“REITs/InvITs, which have emerged as an attractive investment vehicle, may experience some short-term volatility but are expected to remain an efficient option for investors looking to park funds in India’s promising real estate and infrastructure markets,” Crisil said.
In addition, the Budget has also taxed the term and surrender amount of non-ULIP insurance policies where the premium paid by an individual is over £5,000 per year. This could also be bad news for policyholders buying high-ticket non-ULIPs in the affluent segment.
All in all, the government is leaving more of India’s wealthy in addition to the common man – but for the former it is reshaping the landscape for saving, investing and spending.
SEE ALSO
Highlights of the 2023-24 budget: Those earning less than 7 lakh per year do not have to pay income tax
Brides buy half of all gold jewelery sold in India, according to the World Gold Council report
.