Recalibrate your investment portfolios to new tax realities

Budget 2024 has brought in some major changes in taxation which would impact individuals. This article suggests a few do’s and don'ts to help taxpayers avoid unwise actions. Remember that certain budgeting, savings, and asset allocation principles are always good, and one should not discard them. Now let's look at the major changes:  

Equities and equity mutual funds

The short-term capital gains (STCG) tax from equities and equity-oriented mutual funds with more than 65% exposure to equities has increased from 15% to 20% while the long-term capital gains tax (LTCG)--that is, the gains generated after one year of investment--has gone up from 10% to 12.5%.

Investors who invest for short periods, of less than a year, in equities need to realise that the gap between LTCG and STCG has further widened from 5% to 7.5%. This has given one more reason to stay invested long-term to reap the full benefit of the power of compounding.

The Budget has increased the exemption limit for LTCG from listed securities to ₹1.25 lakhs from 1 lakh. Investors should try and utilise this benefit of exemption every financial year to reduce taxes.

Investors who used to park short-term monies in arbitrage funds as they were dearer in taxation, henceforth will have to pay 20% instead of 15% earlier as STCG tax. Now investors will have to check the rate of FDs for the period they plan to invest and compare the post-tax gains with arbitrage funds to choose the favourable one as the tax differential has narrowed.

Futures & options

Investors in futures and options will have to pay higher STT now--from 0.0125% to 0.02% for futures and from 0.0625% to 0.1%. for options. F&O traders who hunt for quick money, including many young investors who have little knowledge, should look at this as a reason to stay away from this time and money-killing activity. Real estate has seen a major change in taxation in many decades in Budget 2024.

Real estate

Real estate, which absorbs 50% of household savings due to the big quantum of money it demands, is the major asset holding value for most Indians. 

The long-term capital gains generated from the sale of real estate, after two years, will be taxed at 12.5% instead of 20% earlier. This while appears as an advantage is not so as the indexation benefit which used to be availed earlier cannot be availed anymore for properties bought on or after 2001. So the change in taxation is advantageous for properties bought before 2001 and in the case of properties bought from 2001, only in cases where the annual gain is more than 10% it could be beneficial.

This change in taxation in real estate should prompt people who are over-invested in real estate to take this as a reason to liquidate and divert to financial investments, particularly those who own more than one house. This should even pick your brain on whether you should invest in a residential property in the first place if the rental yield is less than 2.5%, even if it is for your own use.

Financial investments in equities and equity mutual funds generate much better returns than real estate most often and the biggest advantage they have over real estate is their easy liquidity. So, it's time to divert excess investments in real estate to these products and even debt investments if they have not been given adequate allocation.

Gold and gold bonds

Customs duty on gold and silver has been reduced from 10% to 6% and this has made gold cheaper. This should not warrant splurging money on buying gold to buy cheap. Exposure to gold in a portfolio should be restricted to  5-10%.

If you can hold the investment for 8 years, sovereign gold bonds--which offer an annual interest of 2.5% over and above the value appreciation in gold and tax-free capital gains at the end of 8 years-- are the best way to invest in gold.

National Pension Scheme

The  National Pension Scheme is one of the best retirement products available today. The budget has made NPS even more attractive for private sector employees. Public sector employees have been getting tax exemption on contributions by the employer of up to 14% of their salary. In the case of private sector employees, this was only 10% which has now been increased to 14%.

The NPS, which has the potential to deliver 10 to 12% or more returns through the equity fund option (restricted to 75%), can create a huge retirement corpus for investors; and, 60% of the maturity is tax-free. Private-sector employees should utilise this increase in limit from 10% to 14% to boost their retirement kitty and tax benefits.

The Budget has signalled that the tax system is moving away to the new tax regime in the future. The old regime, which provides for exemptions, has in a way sown the seeds of the investing habit. This incentive is not there in the new regime.

The Budget is not just an event for the financial markets and the country's economy, it's equally a big event for you to relook into your personal finances and realign to improve your financial wellness.

                                                           (By arrangement with livemint.com)