The Budget has no new proposals targeting the super rich. But many of the proposals to plug tax loopholes can impact the investment decisions of high net worth investors. After all, our decisions are guided not only by asset allocation and returns, but also by the tax provisions and how these will impact net returns in our hands.

Yes, the Budget has some proposals that every tax payer would cheer. This includes assured tax savings by the increase in the basic exemption limit from ₹2 lakh to ₹2.5 lakh; enhancement of the deduction ceiling from ₹1 lakh to ₹1.5 lakh and from ₹1.5 lakh to ₹2 lakh for interest paid on self-occupied house property. For income above ₹1 crore, the 10 per cent surcharge continues.

Tax exemption curbed The capital gains exemptions under Section 54 and Section 54 F, which are known as roll-over provisions, were available if the capital gains from a long-term asset were reinvested in “a residential house” within a stipulated time period.

This led to uncertainty as to whether the gains invested in more than one property would also be eligible for relief. It has now been clarified that the capital gains exemption shall be available only when the reinvestment is made in one residential house and it must be situated in India. Where investments are made in property situated overseas, the capital gains would not be exempt from tax.

Earlier provisions exempted proportionate capital gains from transfer of a long-term capital asset if these were invested in specified bonds within a period of six months. Investment in such bonds during the financial year could not exceed ₹50 lakh. The window of six months was being spread over two years in certain cases, resulting in double relief. This Budget proposes to plug this by specifying that the investment made by a tax payer during the financial year in which the assets are transferred and also in the subsequent financial year should, put together, not exceed ₹50 lakh.

Often sellers of property receive an advance from the buyer to ensure serious intent. The Budget states that any advance received and later forfeited due to failed negotiations will be taxed in the same year under the head ‘income from other sources’. Earlier, the advance was reduced from the cost of acquisition of the asset in the year of sale while determining capital gains.

Short-term asset ‘Short term capital assets’ for tax purposes are usually defined as assets held for a period of not more than 36 months. But shares of a company, other securities listed on a recognised stock exchange in India and units of mutual funds, are treated as long-term assets if held for more than 12 months.

An amendment has now been proposed to treat unlisted securities and units of mutual funds (other than equity-oriented funds) as short-term capital assets, when held for less than 36 months immediately preceding the date of transfer.

Moreover, long-term capital gains from debt funds will also be taxed at 20 per cent with indexation benefits, instead of a flat 10 per cent. This, along with increasing the holding period, could render debt fund investments less attractive.

Given the constraints under which the Finance Minister was working and the high expectations from the industry/individuals, the expectation mismatch was obvious. Now, it’s up to every individual to analyse how the Budget impacts his/her financial and savings plan.

The writer is Tax Partner with Ernst & Young. The views are personal

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