Benefit for UHNIs/HNIs in the fine print of Budget 2022

While Budget 2022 has not introduced any significant amendments pertaining to personal income tax, it has sought to provide some relief to High Net-worth Individuals ("HNI") and Ultra High Net-worth Individuals ("UHNIs")  by capping the surcharge for individuals on long term capital gains.  

Currently, individuals are subject to graded surcharge rates which range up to 37% in case the income of the taxpayer exceeds Rs 5 crore. However, the surcharge on certain incomes such as dividends and capital gains arising from the on-market sale of equity shares and certain other securities is already capped at 15%. 

However, gains from other long-term capital assets, mainly from unlisted shares and real estate continued to attract a higher surcharge.

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The difference in the effective capital gains tax rate was one of the parameters which influenced investment decisions in favour of listed shares as against unlisted shares (including start-ups). 

Thus, to provide parity in tax rates to HNIs and UHNIs, on various classes of capital assets, the Budget has proposed to cap the surcharge at 15% for long-term capital gains arising from any kind of asset.  

Accordingly, akin to gains arising from the on-market sale of listed equity shares, long term capital gains arising, whether from the sale of unlisted share, immovable property, shares of foreign company or off-market sale of listed share, would be subject to the surcharge cap of 15%. 

As a result of this proposal, the effective capital gains tax rate will reduce by 2%-4.5%. i.e. taxpayers who are currently required to pay tax at the effective rate of 28.5%, will be subject to tax at the rate of 23.92%. 

Similarly, the long-term capital gains rate for some assets will be reduced from 14.25% to 11.96%, where the base tax rate is 10%. 

However, it would be pertinent to note that such cap is only available with respect to long term capital assets, i.e. where the asset has been held for 12-36 months, depending on the nature of the asset.

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Thus, short term capital gains arising will continue to be subject to a graded surcharge rate ranging up to 37% (except in case of on-market sale of equity shares and certain other assets). 

While this proposal provides benefits to HNIs, it motivates investments in start-ups, by subjecting long term gains arising from unlisted shares and listed shares to the same rate of surcharge.

Thus, by reducing the effective tax cost for investors, this proposal would attract long-term investment for start-ups to fund their expansions, thereby pushing the nation a step closer toward the goal of 'Atma Nirbhar Bharat'.  

This proposal also provides some relief to HNIs who plan to liquidate their real estate investments and expect to clock one time gain on such investments. 

It would be more tax-efficient for taxpayers to conclude such transactions in the next financial year when the Budget proposals are implemented.  

(Kunal Savani, Partner; and Bipluv Jhingan, Senior Associate; Cyril Amarchand Mangaldas.)