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
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:
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.
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 |