Are you a salaried individual? Here’s how the Budget should influence your future investments

The recent Union Budget has introduced several changes impacting various financial aspects for salaried individuals and investors

3-MIN READ

Updated:Jul 31, 2024 05:24:29 PM UTC

The recent Union Budget has introduced several changes impacting various financial aspects for salaried individuals and investors. Let me highlight two important pillars: capital gains tax adjustments and changes in real estate investments

Impact of changes in Capital Gains Tax on your equity: Stocks and mutual funds

The Union budget 2024-25 made two key changes concerning the capital gains tax: Indexation benefits on property sales are being removed, and taxes on stock and equity fund profits will rise. On the plus side, the exemption limit for equity gains has been increased, and a previous issue with non-equity fund taxation has been addressed. How will these changes impact the long- and short-term investments of salaried individuals in stocks and mutual funds?

I'll illustrate these changes with examples.

First off, these are the key revisions you need to know about:

Short-Term Capital Gains (STCG): Increased from 15% to 20%.

Long-Term Capital Gains (LTCG): Adjusted from 10% to 12.5%.

Exemption Limit: Raised from ₹1 lakh to ₹1.25 lakh per financial year.

Sajesh is a salaried employee who earns ₹15 lakh annually. Let’s assume he invests Rs 1 lakh into mutual fund SIPs.

Let’s see the impact on mutual fund SIPs for Sajesh and his investment strategy

Investment Type	Budget Scenario	Purchase Value (₹)	Sale Value (₹)	Capital Gain (₹)	Exempt (₹)	LTCG Tax Rate (%)	LTCG Tax (₹)
Equity Investment	Existing	1,00,000	5,00,000	4,00,000	1,00,000	10.0	30,000
Proposed	1,00,000	5,00,000	4,00,000	1,25,000	12.5	34,375

The rise in Long-Term Capital Gains (LTCG) tax to 12.5% will lead to slightly higher ta payments for long-term investors like Sajesh. However, the Budget also increased the exemption limit for LTCG to Rs 1.25 lakh from Rs 1 lakh per financial year. Hence, if Sajesh earns a profit of Rs 5 lakh in FY 24-25 his taxable amount will be profits minus Rs 1.25 lakh exemption i.e., Rs 5,00,000 – Rs 1,25,000 = Rs 3,75,000. This is lower than the earlier Rs 4 lakh taxable income.

Also read: Budget 2024: Crafting a recipe for sustained growth

Conversely, the increase in Short-Term Capital Gains (STCG) tax to 20% would have a more significant impact on short-term equity investors, as they will face higher tax liabilities on their gains. This would encourage salaried employees like Sajesh to invest for the long-term instead of focussing on short-term gains.

Impact on real estate

Let us review how the budgetary changes will impact if Sajesh decided to sell the property he owns:

Detail	Amount	Remarks
Original Purchase Price (January 2015)	₹1 crore	₹1,00,00,000
Selling Price (January 2024)	₹2 crore	₹2,00,00,000
Actual Capital Gain	₹1 crore	Selling Price - Original Purchase Price
Cost Inflation Index (CII) for 2015	240	CII for the year of purchase
Cost Inflation Index (CII) for 2024	348	CII for the year of sale
Indexed Cost Calculation	₹1.45 crore	₹1,00,00,000 × 348 / 240
Taxable Long-Term Capital Gains	₹55 lakh	Selling Price - Indexed Cost
Tax Rate (with Indexation Benefits)	20%	Old Rule - Applied to the taxable gains
Tax Amount (with Indexation Benefits)	₹11 lakh	20% of ₹55,00,000
Tax Rate (without Indexation Benefits)	12.50%	Applied if the property is sold after July 2024
Tax Amount (without Indexation Benefits)	₹12.5 lakh	12.5% of ₹1 crore

If Sajesh sells his property before July 2024, he can take advantage of indexation that will lower his taxable capital gains and overall tax liability. However, if he sells the property after July 2024, the new budget changes will result in a higher tax rate on the entire profit. This example assumes an annualised return of 8.01% for the property, however, this rate could vary depending on the location and city, which will ultimately effect his actual tax outgo.

Also read: Budget 2024 reforms: How HNI investment decisions may be reshaped

How should your investing behaviour change after budget 2024-25?

Avoid Short-Term Selling: Avoid selling investments in the short term, as short-term capital gains (STCG) are subject to a 20% tax, whereas long-term capital gains (LTCG) are taxed at a much lower rate of 12.5%.

Commit to Long-Term Holding: Maintain your investments over the long term, except if you are engaging in short-term equity trading.

Tax Efficiency and Returns: While the tax benefits for long-term investments may not be substantial, they are still preferable compared to the taxation on fixed deposits (FDs). Additionally, mutual funds generally offer higher returns compared to FDs. Despite these considerations, equity mutual funds remain a compelling investment option relative to other asset classes.

Utilise Systematic Investment Plans (SIPs) Way: Consider investing through systematic investment plans (SIPs) for the long term to leverage the benefits of compounding and to mitigate market volatility.

Diversify Your Portfolio: Diversification across different asset classes can help manage risk and improve your chances of achieving more stable returns. Even within mutual funds, consider diversifying across various sectors and fund types (equity, debt, hybrid).

The writer is a Chartered Accountant and founder of NRP Capitals.