Budget 2023: Many tax loopholes closed in fixed income investments

Budget 2023 has sought to close any possible giveaways or loopholes in all types of fixed income instruments. These seem to have attracted the taxman’s maximum attention this time around.

Market-linked debentures (MLDs) will attract full tax at your slab, coupons paid by listed debentures will entail TDS (tax deducted at source) and all payouts from real estate investment trusts (REITs) and infrastructure investment trusts (InVIT) will be taxable. In short, no income enjoys immunity from taxes as far as fixed income instruments are concerned.

Taxing debentures

Market-linked debentures were popular with investors who could take higher risks in lieu of better-than-debt returns. Most of these MLDs operated in a manner that envisaged payment of interest subject to performance of a benchmark – say, 25 per cent of the Nifty’s returns in one year or 10-year g-sec yield plus 300 basis points, for example. Many MLDs also included derivative products.

Because the amounts involved were high – usually Rs 25 lakh to Rs 1 crore and above – these were placed in private by issuers to select group of investors, though the MLDs would trade in the markets.

Currently capital gains tax for a holding period of more than a year is 10 per cent without indexation. And the returns were in double-digits in many of these cases, and certainly higher than debt funds or bonds.

Budget 2023 has made all gains and any coupons paid fully taxable at your slab. All gains shall be deemed to be the capital gains arising from the transfer of a short-term capital asset and fully taxed.

TDS applicable

The next proposal pertained to bringing listed debentures under the TDS ambit. Right now, coupons or interest amounts paid by listed debentures (in demat form) did not attract TDS. Apparently, this caused under-reporting of interest incomes when investors filed their tax returns. Therefore, tax will be deducted at source on all coupons paid.

Payouts from REITs and InVITs

This proposal is probably going to hit the retail investor the most. A major attraction of REITs was the income that they would distribute income periodically, a bulk of which was tax free. But not anymore. REITs distribute income in the form of interest, dividend, rental income and repayment of debt. Of these four, the first three are taxable in the hands of unitholders at their slab rate. Repayment of debt was a payout by the business trust to unitholders. Though this may be considered a repayment of principal, the taxman is of the opinion that it is an income that is taxed neither in the hands of the trust nor of the unitholders. Therefore, this income will also be fully taxed at your slab. REITs distribute 80-90 per cent or more of their payouts via the repayment of debt mode. Earning a 6.5-7 per cent post-tax yield will no longer be possible. Brookfield India Real Estate Trust, Embassy Office Parks REIT and Mindspace Business Parks REIT will become less attractive.

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