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Major Changes for Investors and Taxpayers Applicable from 1st April 2023

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Finance Minister, Shrimati Nirmala Sitharaman, announced major changes in the Budget 2023 and the Finance Bill 2023. The reforms were unveiled for the tax-paying, hard-working middle class and aimed to simplify the tax system. Effective April 1, 2023, these changes will impact taxpayers and investors. 

Let’s deep dive into some of the major changes and things you should do before March 31 to safeguard yourself. 

New Income Tax Regime

The Indian government has made significant changes in the income tax rules that will come into effect from April 1, 2023. The default tax system would be shifted to the new income tax regime, and tax assessors could still choose from the prior regime. 

The cap for tax rebate has been increased to Rs 7 lakhs from Rs 5 lakhs, which means citizens with income up to Rs 7 lakhs will have to pay no tax, irrespective of the quantum investment they make. 

To make the new tax regime attractive, the government has maintained a standard deduction of Rs 50000, which does not require any bills to be submitted to the employer for the exemptions.

Slab (INR)Tax Rate
0 – 3,00,000Nil
3,00,000 – 6,00,0005%
6,00,000 – 9,00,00010%
9,00,000 – 12,00,00015%
12,00,000 – 15,00,00020%
Above 15,00,000 30%
Slabs and Tax rates under the New Regime

Debt Mutual Funds

The Indian government has proposed significant changes to the long-term capital gain (LTCG) tax benefits for debt fund mutual investors. As per the proposed amendments in the Finance Bill 2023, any gains on an investment in a mutual fund where up to 35% of funds are invested in the Indian equity market will be deemed short-term capital gains. This change will apply to investments made on or after April 1, 2023.

Currently, Investors who hold debt funds are liable to pay income tax on capital gains as per their income tax slab for three years. Subsequently, these funds are subject to a tax rate of either 20% with indexation benefits or 10% without indexation. However, under the proposed changes, investors in debt funds will lose the LTCG tax benefit, which was one of the biggest reasons for investing in debt funds over fixed deposits. This could be a significant setback for mutual fund investors and impact investor portfolios.

Market Linked Debentures

Market-Linked Debentures (MLDs) are debt instruments regulated by the Securities and Exchange Board of India (SEBI) that offer fixed returns based on the underlying market index’s performance. 

Starting from April 1, 2023, all capital gains that arise from the transfer, redemption, or maturity of MLDs will be treated as short-term capital gains and taxed according to the investor’s applicable income tax slab rates, thereby putting an end to the grandfathering of previous investments. This change will negatively impact the mutual fund industry.

Other changes that will come into effect from 1st April 2023 

  • The Indian government will tax proceeds from life insurance premiums exceeding Rs 5 lakhs annually. However, this new income tax rule will not apply to Unit Linked Insurance Plans (ULIPs). Only life insurance policies with an aggregate premium of not more than Rs 5 lakhs will be exempt from taxation. Policies issued after April 1, 2023, will be subject to this rule.
  • The maximum deposit limit for the Senior Citizen Savings Scheme will be doubled to Rs 30 lakhs from Rs 15 lakhs. Additionally, the maximum deposit limit for the monthly income scheme will also increase, rising to Rs 9 lakhs from Rs 4.5 lakhs for single accounts and Rs 15 lakhs from Rs 7.5 lakhs for joint accounts.
  • Converting physical gold to an Electronic Gold Receipt (EGR) or vice versa will not be considered a transfer and will not be subject to capital gain tax. A SEBI-registered vault manager can do this conversion without any capital gain tax.

Things you should do before 31st March 2023

  • Invest in tax-saving instruments 
  • Pay Advance Tax
  • Add/Update nominee your Mutual Funds and Demat account 
  • File Updated Income Tax Return

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