From insurance policies to MFs, here are the new tax rules from April 1

The Centre had, in the Union Budget, proposed to tax proceeds from high-value insurance policies, with aggregate premium of Rs 5 lakh and above, sold on or after April 1, 2023 at an individual tax rate. This was done to plug the gap that was being exploited by high-net-worth individuals (HNIs) to claim tax-free returns from high-value insurance policies. The government’s rationale is that several HNIs are misusing the exemption provided under Section 10 (10D) of the Income Tax Act by investing in policies having large premium contributions (as it is acting as an investment policy) and claiming exemption on the sum received under such life insurance policies. Insurance companies have said this may result in such policies generating negative returns (inflation adjusted).

The securities transaction tax (STT) on the sale of futures and options (F&O) will go up by 25 per cent. The Finance Bill, 2023, announced an increase in STT from the current rate of Rs 5,000 to Rs 6,250 per Rs 1 crore for sale of options. Further, for sale of futures in the securities, STT rate has been increased from 0.01 per cent to 0.0125 per cent, translating into Rs 1,250 per Rs 1 crore. This will essentially increase the cost of trading for traders and increase their breakeven point.

Capital gains on debt mutual funds (MFs), gold ETFs and international funds will be taxed at individual income tax slab rate. At present, debt fund investments of over three years qualify for long-term capital gains tax (LTCG). This means that gains are taxed at 20 per cent with indexation benefits. Investments of less than three years qualify for short-term gains tax (STCG) and the investor has to pay tax at his slab rate. This will make post-tax returns for debt MFs unattractive. Investors could shift from debt MFs to bank FDs, which have similar tax treatment.

In this year’s Union Budget, the investment limit under the Senior Citizen Savings Scheme has been enhanced from Rs 15 lakh to Rs 30 lakh. This government-backed scheme for people aged 60 years and above generally pays higher interest rates than standard fixed deposit schemes. The increase in investment limit means senior citizens can now put a larger corpus in this scheme and earn better returns. For the last quarter of FY23, the interest rate on this scheme was fixed at 8 per cent.

In Union Budget 2023, the government said the conversion of physical gold to electronic gold receipt (EGR) will not come under the purview of the capital gains tax. This is expected to promote investments in the electronic equivalent of gold. EGRs are depository gold receipts traded on the stock exchanges. Under this form, investors buy the gold in dematerialised form and are given gold receipts instead of physical gold.

Come April 1, prepaid instruments, which include wallets, will be interoperable in the UPI ecosystem. This means, full KYC wallet customers can use their wallet balance to pay merchants with any QR codes. However, there will be an interchange fee of up to 1.1 per cent that the merchant has to pay to the issuer of the wallets in this case, if the transaction value is more than Rs 2,000. And, the issuer of the wallet has to pay a 15 bps charge to the remitter’s bank account when it gets loaded with an amount of over Rs 2,000. Having said that, peer-to-peer (P2P) transactions and peer-to-merchant (P2M) transactions through bank accounts remain completely free for the customers as well as merchants.