Budget 2024 reforms: How HNI investment decisions may be reshaped
It's not just about preserving wealth – it's about growing it wisely in a changing landscape. The investors who thrive will be those who see these reforms as a catalyst for improvement, not a cause for concern
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The 2024 Union Budget has introduced noteworthy changes to capital gains taxation, signalling a significant recalibration for High-Net-Worth Individuals (HNIs) in their investment approach. As an observer of market trends, I can assert that while these reforms aren't seismic, they are far from trivial. These changes reflect a broader shift in India's economic policy, aiming to streamline the tax structure and promote more efficient capital allocation.
The government's push towards tax harmonisation across asset classes is a calculated move that reshapes the investment landscape. HNIs can now explore avenues such as private equity and venture capital funds, pre-IPO investments, angel network investments, and direct stakes in promising unlisted companies, all on a more level-tax playing field.
Let's delve into these reforms and explore how they might reshape investment decisions in the coming years, uncovering both the challenges and the hidden opportunities they present.
At the heart of these reforms lies a push towards simplification in the treatment of investment returns. The uniformity in determining Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG) for both listed and unlisted asset classes and related taxation changes necessitates a thorough review of investment portfolios. This isn't just about tweaking allocations; it's about optimising asset distribution, leveraging newly tax-efficient investment avenues, and ensuring alignment with overarching financial goals.
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One of the most significant shifts is equalising the playing field beyond domestic borders. This development opens a world of opportunities for HNIs to diversify through overseas investments. The strategic importance of this cannot be overstated – it allows for mitigating geographic concentration risks and constructing truly diversified portfolios across global asset classes. Particularly noteworthy is the advantage of investing in countries with which India shares double taxation avoidance treaties, covering over 80 nations, including major economic powerhouses like the US, UK, and EU countries.
Another game-changer is the removal of previous advantages in holding ETFs abroad through the Liberalised Remittance Scheme (LRS) route. This reform benefits HNIs by making domestic and international fund options more attractive without sacrificing tax benefits. It's a welcome move that simplifies tax compliance, reduces administrative burdens, and allows investors to tap into the expertise of local fund managers who are well-versed in navigating global markets while adhering to domestic regulations.
In the real estate sector, removing indexation benefits for properties acquired post-2001, paired with a reduction in tax rates to match LTCG on equity, marks a significant shift. While real estate will likely remain an emotionally driven purchase for many, this change diminishes its appeal as a tax-efficient investment. Consequently, we may see a reaffirmation of investment flows from traditional real estate to more liquid financial assets. HNIs might increasingly gravitate towards equities, mutual funds, and other financial instruments that offer greater liquidity, diversification potential, and possibly higher returns.
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While the budget does include a marginal increase in capital gains tax on listed equities, it's crucial to view this in a broader context. The government's trajectory since 2018 has been towards an exemption-free state, aiming for long-term fiscal health. Despite short-term adjustments, equities remain a proven wealth creator over the long haul. India's fundamental growth story and the ongoing trend of financialisation are likely to sustain the inflow of funds into the market.
In the end, it's not just about preserving wealth – it's about growing it wisely in a changing landscape. The investors who thrive will be those who see these reforms as a catalyst for improvement, not a cause for concern.
Anuragg Jhanwar is a partner and co-founder at Upwisery Private Wealth.