Who is a crorepati?

While the FM has rightly put a surcharge on incomes of Rs 1 crore, the reduction in abatement for properties worth the same price seems a little unfair

After the Union Budget, many people are asking their friends in jest ‘Are you a crorepati’? And for good reason. The finance minister has proposed a 10 per cent or Rs 3 lakh surcharge on people with taxable incomes of Rs 1 crore. In other words, the total income of the taxpayer in the bracket would be around Rs 1.2 crore -1.5 crore.  

In addition, the rate of abatement for properties over Rs 1 crore has been reduced from 75 per cent to 70 per cent. In other words, you will have to pay service tax on homes and flats costing over Rs 1 crore or having a carpet area of 2,000 sq ft at 30 per cent instead of 25 per cent earlier.

Of course, the number of people – 42,800 – that the finance minister declared in the Rs 1 crore income bracket does not ring quite true. As Ashwin Parekh, tax-partner at Ernst & Young, says, “The real number (42,800) may be five to 10 times more than it is on paper now.”

A wealth report by Capgemini puts the population of high net worth individuals (HNIs) at 1.26 lakh in 2011. This is actually down from 1.56 lakh in 2010. The definition of HNIs is a net worth of at least $1 million or Rs 5 crore. So, the annual income of these HNIs, as defined by Capegemini, need not be Rs 1 crore. “Not everybody who has assets worth crores may fall in this bracket. Reason: Some may have income from tax-free dividends and interest. Whereas, some may have an inherited property,” said Homi Mistry, partner at Deloitte.

But another report by Kotak Wealth and Crisil Research gives a more interesting projection. It says India is going to have 2.86 lakh ultra HNIs by 2017, up from 81,000 in 2012. The definition of an ultra HNI: A net worth of Rs 25 crore. This implies that the number of people who will enter the Rs 25-crore net worth club will rise by over three times in five years. No wonder, most people doubt the veracity of the FM’s number.

However, the reduction in abatement for houses costing Rs 1 crore seems a bit unfair. To buy a house of Rs 1 crore, if one is taking a loan of Rs 50-80 lakh, the take-home monthly salary of the person or family (if jointly taken) should be Rs 1.5 lakh – Rs 2 lakh (since banks will allow only 40-50 per cent of take-home salary as home loan equated monthly instalment). In other words, the annual salary of these families should be Rs 18-25 lakh – not too high by metro standards. Maybe, the minister could have created slabs for this abatement according to Tier-1, Tier-II or Tier-III cities.

As a result, lower tax benefits for buying a house of Rs 1 crore especially in metros, sounds quite unfortunate. Ashutosh Limaye, head-research, Jones Lang Lasalle, says, this could impact all potential buyers in metros, as one will not find a decent house even within the Rs 1-crore limit. But ‘one crore’ has certainly become the flavour of the season. In January, the banking regulator, Reserve Bank of India, put out a circular changing the definition of bulk deposits (ones which get special rates) from Rs 15 lakh to Rs 1 crore.

While Rs 1 crore seems to be the new definition for the rich, living in our metros is equally expensive. Perhaps, taxation should take this into account.