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Shocker For Debt Funds, Relief Under New Tax Regime — Top 5 Changes In Finance Bill, 2023

The amendment to the Finance Bill brings relief for taxpayers whose income is nominally higher than Rs 7 lakh.

<div class="paragraphs"><p>(Source:&nbsp;Freepik)</p></div>
(Source: Freepik)

Shocker for debt mutual funds, marginal relief under the new income tax regime, softening the tax blow for investors in REITs and InvITs, increase in tax rate for royalty income—the government has made a slew of changes to the Finance Bill, 2023, which was passed in the Lok Sabha earlier today. This includes several amendments to the Income Tax Act, the Customs Act, and the CGST Act.

Here are some of the key changes made to the bill:

Opinion
Finance Bill 2023: Massive Relief Proposed For Investors Of REITs, InvITs

Gains From Debt Mutual Funds To Be Taxed As Short Term Capital Gains

Gains arising from debt mutual funds will now be treated as short-term capital gains. The earlier version of the Finance Bill, 2023, had proposed this treatment for market-linked debentures. The amendment expands the scope to include specified mutual fund schemes, i.e., schemes with a domestic equity contribution of less than 35%.

This has been introduced to reduce the arbitrage in taxation of interest income and capital gains income under the present regime, said Ajay Rotti, partner at Dhruva Advisors.

The intention is to ensure that funds whose underlying income emanates from interest income do not receive the indexation benefit and lower tax rate usually attributed to long-term capital gains.
Ajay Rotti, Partner, Dhruva Advisors

The proposal will impact not just debt mutual funds but also funds whose majority investments fall under the non-equity category, such as gold funds. Additionally, since the language says less than 35% in domestic companies, funds that invest in foreign equities will also be impacted, Rotti said.

Opinion
Debt Mutual Funds Will Lose Tax Advantage Starting April

New Income Tax Regime: Marginal Relief 

The amendment to the Finance Bill brings relief for individual taxpayers whose income is marginally higher than Rs 7 lakh. An individual whose total taxable income is above Rs 7 lakh and whose tax liability is more than the amount in excess will be allowed to seek a deduction on the income tax. The deduction would be the difference between the excess amount and the tax payable.

The proposal will hugely benefit individuals whose income is marginally higher than Rs 7 lakh, said Rotti.

While the Finance Bill, 2023, proposed tax exemption for income up to Rs 7 lakh, it brought anyone who earns even slightly more than the stipulated amount to taxation. The proposal would ensure that the tax liability of such persons do not exceed the amount they are earning in excess of the limit.
Ajay Rotti, Partner, Dhruva Advisors

Relief For REIT, InvIT Investors

The government has amended the Finance Bill, 2023, to soften the tax impact on unit holders of REITs and InvITs.

To recap, the bill had proposed that distributions by REITs and InvITs classified as 'repayment of debt' will be taxed in the hands of unitholders effective April 1, 2023. Currently, only distributions in the form of interest, dividends, and rental income are taxed in the hands of the unitholders or investors at the applicable income tax slab.

Now, the government has proposed a change to the Finance Bill, 2023, by providing a formula for calculating the tax implications when distributions are made as 'repayment of debt'. So far, the entire amount classified as 'repayment of debt' has been proposed to be taxed. Now, the proposed change is that only a "specified sum" will be paid, and the amendment to the Finance Bill has provided a formula to determine this amount.

Opinion
Finance Bill 2023: Massive Relief Proposed For Investors Of REITs, InvITs

Online Gaming: Early Tax Prep

The government has advanced the effective date of taxation changes made to online gaming. According to the proposed amendment, the changes would be applicable from April 1 instead of July 1 as proposed in the original bill.

In Budget 2023, the government proposed to introduce a new provision—Section 194BA—in the Income Tax Act to impose TDS obligations on tax winnings from online gaming, regardless of the quantum of winnings. At present, only winnings that are above Rs 10,000 are subject to TDS.

The TDS obligation will now kick in, effective April 1, with the passage of the Finance Bill in Parliament today.

Royalty, Fee For Technical Service: Tax Rate Hiked To 20%

Income accruing to non-residents from royalties and fees for technical services from India will now be taxed at 20%, as against the existing rate of 10%. This includes any consideration for rendering managerial, technical, or consulting services and any income arising out of sharing intellectual property with an Indian concern.

The change will affect non-residents from countries that don't have a Double Taxation Avoidance Agreement with India.

Most tax treaties prescribe a rate less than 20% for such payments, but the higher rate will become relevant where treaty benefits are sought to be denied by the revenue authorities for reasons of tax avoidance and GAAR, experts told BQ Prime.