Budget 2023: Default new I-T regime will kill 80C investment industry

One good thing Finance Minister Nirmala Sitharaman did while presenting the Budget for 2023-2024 was that she did not indulge in major tinkering with her budget proposals in the capital gains regime.

More focus on promoting the New Income Tax regime will discourage the investment intended to financialisation of savings and prove detrimental to section 80 C of the Income Tax Act. However, this may prove to be a blessing in disguise for the mutual fund (MF) industry and other traditional investment products like Bank Fixed Deposits (FDs) and Equities.

While bringing the focus on migrating taxpayers to the new Income Tax regime, there would be some negative impacts on the trend of financialisation of savings in the new regime. This would be because there is no incentive for investments by way of a deduction for specified investments or expenses under Chapter VI-A. This migration could potentially kill the 80C investment industry.

Under the new regime, there would be no push for ELSS investments or availing housing loans due to interest rebates. The growth of the ELSS category has been slowing for the past few years and with a push toward the new regime, the growth of the ELSS category would be further challenged.

Digitising Protection Fund claim process

The move to digitise the Investor Protection Fund claim process of unclaimed shares and dividends is a big positive and could result in significant relief. The current process is physical, lengthy, and cumbersome and a digital process will be welcome.

Payment of insurance premiums to hit sector

A proposal in relation to the payment of insurance premiums is likely to hit the insurance players. It says, if premiums paid on insurance policies exclusive of Unit Linked Insurance Policy (ULIP) exceed Rs 5 lakh in a year, then the proceeds from those policies will be taxable (except in case of death benefit).

This is expected to prove grossly negative for the insurance sector– as it will impact savings products which are usually high-value and margin products (though not protection). However, smaller policies remain unaffected.

Overall, it is a negative for insurance companies as it will impact the high-value premium policies – thus impacting overall industry Gross Written Premium (GWP) growth. A similar provision was already introduced for ULIPs in 2021 wherein the aggregate premium was restricted to INR 2.5L in a year for tax-exempt proceeds.

What is bad for the insurance industry actually acts as a blessing in disguise for the mutual fund (MF) industry. A lot of mis-selling was happening in the insurance industry where investors were sold a packaged investment-cum-insurance product as an endowment scheme or other schemes where premium outlay for investors in a financial year used to be Rs 5 lakh and above. So, they were actually sold some investment product with some insurance part in it.

Now, with the tax advantage of such schemes going away, such products will become less lucrative for investors and therefore we believe that a large part of this money which would have otherwise have been invested in insurance, will now come either to MFs or fixed deposits (FDs) or equities. So, this will be the indirect implied benefit, so what is bad for the insurance sector could result in being better for the MF sector.

Indirect surcharge tax for large property transactions

Clause 25 of the Bill seeks to amend Section 54 of the Income-tax Act relating to profit on the sale of property used for a residence where the capital gains shall be capped at 10 crores. This is likely to have a major negative impact on the high-end luxury residential markets since transactions that used to be tax neutral could result in a tax outlay. Our sense is that this provision acts as a super luxury surcharge tax.

The writer is Founder & CEO SAMCO Group Views expressed are personal.

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