What impact will the Finance Bill 2023 have on Investors?

The Finance Bill 2023 was passed by the Lok Sabha with 64 amendments, on March 24.These changes will come into effect from April 1, 2023. But what impact will the Finance Bill 2023 have on investors? Let's find out.

Impact on Investors by Finance bill 2023:

1.    Removal of long-term tax benefits for debt mutual funds:

According to the Finance Bill of 2023, mutual funds that invest less than 35% of their assets in domestic equities would be considered short-term, and the indexation benefits that substantially reduce their tax burden might be eliminated prospectively.

This means debt funds held for more than three years would no longer get indexation benefits, and long-term capital gains (LTCG) will cease to exist. This is a substantial disadvantage for investors. LTCG is what made the investment in the debt mutual fund beneficial. Now, investments in debt funds will be comparable to any other standard debt product, such as fixed deposits.

This modification could increase bank deposits. The inability of bank deposits to keep pace with the demand for credit over the past year has increased the cost of capital for lenders.

This shift is also unfavourable for the MF business, as debt funds are one means to acquire AUMs.

The applicable tax rate would therefore depend on the investor's income tax bracket.

Currently, investors in debt funds pay capital gains tax based on the income tax bracket during a three-year holding period. After three years, these funds pay either 20% with indexation benefits or 10% without indexation benefits.

The indexation benefit and LTCG tax will no longer be available for investments made after April 1.

It will encourage a greater number of retail investors to participate directly in the debt markets, including G-Secs and corporate bonds, rather than through wholesale intermediaries like as mutual funds.

2.    Futures and Options:

Among other changes to the finance bill, the government increased the securities transaction tax (STT) on futures and options contracts. The price increases would take effect on April 1.
 
As per amendments to the Finance Bill 2023, Securities transaction tax (STT) on selling options has been increased to 0.062% from 0.05%. Under the new rules, option traders will have to pay Rs 6,200 for every Rs 1 crore worth of turnover as against Rs 5,000 that is being paid currently. This translates into a hike of around 25%. On the options side, the STT is charged on premium and not the strike price.

In the meantime, the finance ministry has also hiked STT on sale of futures from 0.01% to 0.0125%. This translates into a 25% hike. In other words, traders will now have to pay STT of Rs 1,250 on Rs 1 crore of turnover while selling futures.

According to a recent SEBI report, the number of individual traders in the F&O category has surged sixfold over the past three years, from 7.1 lakhs to 45 lakhs. The new STT calculation will undoubtedly affect traders break-even estimates, which could have an impact on volumes. These changes will impact high frequency traders and those selling options on a regular basis the most.

3.    REITs and InvITs:

To give you a recap, during the presentation of the Union Budget on February 1, the government proposed to tax income distributed by business trusts like REITs and InVITs in the form of debt repayments at the hands of unitholders. 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.

This proposal saw considerable pushback from industry, with Embassy Office Parks REIT Ltd. saying 40% of its distribution will be impacted.

Therefore, the government has soften tax on REITs and InvITs. The tax burden on real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) was substantially lowered by one of the major revisions to the Finance Bill 2023, which was passed on March 24. The debt repayment component of REIT and InvIT distribution income has entered the tax net, however the taxed amount will be determined only after subtracting the cost of acquisition of units, so only a small fraction may be subject to capital gains tax upon sale of units.

Initially, the Finance Bill 2023 proposed taxing business trust distributions as income from other sources at applicable rates. The latest amendment, however, intends to regard it as a return of capital, so reducing the cost of acquisition to the unit's issue price. Any excess distribution over the issue price is taxable as income. This modification is anticipated to provide unitholders with advantages over the initial proposal.

So that was all about how the new finance bill impact investors. I hope you have found this article insightful. Stay tuned for more such informative articles.