For the rich or the high net worth individuals (HNIs), the Union Budget has made a host of hitherto tax-free or low-tax investment avenues unattractive.
As an HNI looking to wade through the Budget and make an informed call on your investments, here is what you can do on some key aspects of your personal finance.
Move from insurance, MLDs to mutual funds
If you are one of those wealthy individuals who likes the tax-free proceeds from insurance products (endowment, moneyback and the like), the Budget has sought to play spoiler with your choice. Given that all proceeds from products with premiums in excess of ₹5 lakh from life insurance products would be taxed at your slab, you should rethink your investments. Also, ₹5 lakh is the limit on all life insurance premiums except term covers. So far, you invested even if the returns were 4-6 per cent because the proceeds were tax free. Now may be the time to change tack.
The Budget also took the sheen off another HNI favourite — market-linked debentures or MLDs. With ticket sizes ranging anywhere from ₹25 lakh to ₹1 crore, MLDs currently offer equity-like taxation on gains made beyond a one-year holding period. But now the Budget has made the entire proceeds of the MLDs taxable.
All payouts from real estate investment trusts (REITs) would be taxed irrespective of the head under which such amounts are distributed. Currently, payouts under the repayment of debt category, which usually represented 45-90 per cent of most REIT payouts, will now be fully taxed. Therefore, from 6.5-7 per cent, the yields on REITs would be more in the 4.5 per cent range for those in the highest tax slabs.
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Alternatives: You can consider debt funds, especially target maturity funds and Bharat Bond ETFs that come with lock-ins of 4-15 years. Currently, yields are in the 7.2-7.6 per cent range. You can consider some of these for your investments as these carry indexation benefits. You can earmark specific sums for specific life goals with target maturity funds. With inflation generally averaging around 6 per cent, you will pay fairly low tax on the final proceeds. Your final returns or yields post tax are more likely (though not assured) to be above 6.5 per cent, if you hold these funds till maturity.
If you are an HNI obsessed with safety, tax-free bonds of NABARD, IREDA, HUDCO, REC and NHAI are good alternatives. You can get in excess of 5.5 per cent returns from these bonds. These are post-tax returns and still reasonably attractive compared to other fixed income options such as deposits.
Another alternative is to invest in government bonds. You can consider floating rate government securities. For example, the GOI FRB 2033 currently offers 8.15 per cent yield.
Choose proposed new tax regime
One welcome announcement for the wealthy was a reduction in peak surcharge if they choose to opt for the new tax regime. For instance, for those with ₹10 crore income, the savings would be to the tune of ₹38 lakh if they move from the old tax regime to the new one.
By reducing the surcharge from 37 per cent to 25 per cent, the effective peak tax would come down to 39 per cent at the peak. For those with substantial dividend income and payouts or income streams from other sources, it may be a good idea to shift to the new tax regime from the next fiscal. As an HNI, you are less likely to have too much use for 80C tax investments or home loan deductions. And if there is nothing substantial on these fronts, shifting to the new tax regime will reduce your peak rate from 42 per cent levels to 39 per cent.