As the dust settles on the debate among taxpayers over the pros and cons of the Budget, it is more important to deal with the situation that the new proposals would place any investor in, especially while juggling asset classes.

Ambiguity on some proposals

To brush up, profits from listed stocks and equity-oriented mutual funds will qualify for long-term capital gains if held for 12 months or more, as before. But tax in gains in excess of ₹1.25 lakh will be 12.5 per cent, up from 10 per cent currently for gains more than ₹1 lakh.

In the case of all other asset classes – property, gold (including ETFs), bonds, debentures – long-term capital gains will kick in after a holding period of 24 months. And LTCG tax will be 12.5 per cent, down from 20 per cent with indexation benefits in some cases. On gold ETFs, another view is that since they are listed, capital gains made with more than 12 months holding period would be taxed at 12.5 per cent (see below).

With respect to debt funds – especially after the clarification given on specified mutual funds – strictly going by the memorandum and Finance Bill, irrespective of holding periods, all profits are added to your income and taxed at the applicable slab. However, some experts believe that long-term capital gains after 24 months will be taxed at 12.5 per cent, while short-term profits would be taxed at 20 per cent.

More savings to factor in tax change

Ideally, market-linked investments must be directed to specific goals for better product choices and greater focus.

Usual goals for retail investors include saving for children’s education, their marriage, retirement, overseas travels and other such targets.

For example, let’s say an investor deploys a lump-sum of ₹40 lakh over a period of many years, with the aim of reaching a target of ₹1 crore. With no tax, the profits required would be ₹60 lakh. However, with 10 per cent tax (and ₹1 lakh threshold), the amount required on a post-tax basis for reaching ₹100 lakh would be ₹107.66 lakh.

With the new Budget proposal that seeks to tax equity gains at 12.5 per cent (and ₹1.25 lakh threshold), the investor would require ₹109.82 lakh pre-tax to make ₹100 lakh post tax.

In the above example, the investor has to plan for ₹2.16 lakh more to reach the same goal due to higher taxes.

With bond funds, it becomes tougher - Deposit interest of banks or NBFCs, coupons on bonds or debentures, etc., become fully taxable at your applicable slab rate. Capital gains would have 12.5 per cent tax on long-term profits of debentures or bonds.

But investing in a debt fund could mean gains being taxed at your slab irrespective of holding periods. Of course, as mentioned earlier, the taxation here still needs full clarification.

Reducing stocks or equity funds exposure and increasing the debt portion as an investor nears a goal is logical – say, selling small-cap fund units and buying money market schemes. When you pare equities, you will have to pay a capital gains tax. When the balance portion is parked in a debt fund, you could pay 30 per cent tax (assuming that slab rate) on the profits made.

Planning for a new regime

Given all the changes, some key aspects of financial planning become even more critical now.

First, it is important to get your investment choices right for the most part — whether they be mutual funds across categories, stocks or gold funds. Taking the help of an investment adviser or distributor is very important for those who aren’t savvy and informed DIY investors.

Getting the choices wrong and having to churn the portfolio frequently could mean more outflows on account of taxes and considerable value erosion.

Second, and the more obvious part is to ensure you calculate your corpus requirements for specific goals on a post-tax basis and then plan investments accordingly.

Of course, tax rates may be changed in the future as well.

One way to go about the task of planning for higher taxes is to factor that into your return expectations. Let’s say, you are currently working on a long-term goal with an XIRR assumption of 13-14 per cent. You can reduce the XIRR by a couple of percentage points and rework the goal requirement.

Another way to do it is to assume a high rate of taxation (say, 25-30 per cent) and add that to the total corpus calculations.

Third, choices based on the taxation of products should no longer be the focus for investors, as it doesn’t help reach intended goals. Now that rates and holding periods on asset classes are rationalised, it is all the more essential to be goal oriented.

Finally, asset allocation – spreading investments across equity, gold and debt – becomes very important with every churn you plan.

Tax tweaks on gold investments

Gold is considered a portfolio diversifer, being an inflation hedge and having negative co-relation with equities over the long-term. Physical gold including jewellery, gold ETFs (exchnage traded funds) /funds, Sovereign Gold Bonds (SGBs) and digital gold are the modes in which investors take exposure to gold. The budget has tweaked taxation for investors in the yellow metal.

For physical gold such as bars and coins and gold jewellery, LTCG (long-term capital gain) tax has been brought down to 12.5 per cent from the earlier 20 per cent. However, the indexation benefit has been removed. On the other hand, the holding period for LTCG is now 24 months compared to earlier 36 months. The STCG (short-term capital gain) will continue to be taxed at slab rate.

Gold funds and digital gold get the same treatment of physical gold. But investors should note that digital gold is unregulated.

That said, some clarity is required with respect to taxation of gold and silver ETFs (exchange traded funds).

In 2023, gold and silver ETFs were classified into specified mutual funds, leading them to be taxed at the investors’ income tax slab, irrespective of the holding period. As per the Budget, the LTCG tax on gold and silver ETFs is brought down to 12.5 per cent (without indexation) from 20 per cent (with indexation).

But it is unclear as to whether the capital gains will be considered as LTCG above 12 months or 24 months. Some see ETFs to be listed securities and so, the LTCG will be applicable for holdings more than 12 months.

Another interpretation is that, LTCG will kick in only after 24 months and will be taxed at 12.5 per cent without indexation and STCG will be taxed at 20 per cent.

The new rules are effective April 1, 2025. Therefore, for the current financial year, the existing rule of taxing at the applicable rate will be retained and investors can wait and watch for clarity.

After all the tweaking of taxes in other avenues, SGBs remain the most tax efficient instrument. If you hold till maturity of eight years, the capital gains will be fully exempt. However, investors should remember that as with any gold-linked instrument, the price risk exists even in SGBs.

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