The Union Budget 2024 and the Finance Bill made certain changes to taxation rules.

Equities

As soon as the Finance Minister announced an increase in long term capital gains (LTCG) tax rate from 10 per cent to 12.5 per cent, there was a huge negative reaction. Stock prices and indices fell and people were dismayed. However, to think of it objectively, from your capital gains, the government is taking away a little more, 12.5 per cent against the 10 per cent earlier. Other fundamental aspects like growth of the Indian economy, new investors joining the market, new cash coming in etc. remain intact.

In equities, it is possible to do tax harvesting. Since equity investments are meant for long-term horizon, you effectively stay invested. As and when the price of the stock/NAV of the fund moves up, you can sell (i.e. book gains) and purchase the same share/MF Scheme. Let’s say the price/NAV as on the date of acquisition was ₹100 and you would eventually sell it after 10 years when the price would be, say, ₹200. At that point, you would pay tax on ₹200 minus ₹100 = ₹100. You would pay tax in the financial year (as per then prevailing rules), on the gains more than the threshold.

The threshold, which was ₹1 lakh earlier, has been raised to ₹1.25 lakh now, per financial year. Let us say today, after the rally in equities, price/NAV has moved up to, say, ₹130. Today, if you sell the share/MF scheme at ₹130 and purchase it again, as long as the gains i.e. ₹130 minus ₹100 = ₹30 is within ₹1.25 lakh in the financial year, it is tax free. How it helps you is, through this transaction, cost of acquisition for tax purposes moves from ₹100 to ₹130, which will be relevant when you eventually sell it after another, say, 7 years at ₹200. At that point, your gains will be ₹200 minus ₹130 = ₹70 instead of ₹100.

Let’s say you invested ₹10 lakh in equity MFs more than one year ago and the portfolio value today is ₹11 lakh. You can redeem the entire portfolio as the gains are within ₹1.25 lakh in the financial year. If the market value of the portfolio today is, say, ₹12 lakh, then for executing this strategy, you have to sell as much so that the gains are within ₹1.25 lakh to avoid paying tax. This assumes you invested in the fund lump sum and exited on a particular date. However, you may have invested via a Systematic Investment Plan and may withdraw via a Systematic Withdrawal Plan in which case, the NAV of the earliest investment will be taken (First In First Out).

Bonds

In bonds, most of the returns come from the coupon or interest. This is unlike equities — in equities, dividend yield is low and most of your returns come from price appreciation. Bond interest was, and remains, taxable at marginal slab rate (MSL). Your tax incidence is relatively lower on the capital gains component. For a listed bond, for a holding period of more than one year, if you sell the bond at a profit, the long term capital gains are taxable at 12.5 per cent currently, which was 10 per cent earlier.

This is considerably lower than MSL, which for most investors, is 30 per cent plus surcharge plus cess.

One change brought about through this Budget is capital gains on unlisted bonds is now taxable at MSL irrespective of the holding period.

In equity MFs, it remains more-or-less same as earlier. Tax rates have changed in line with taxation of equity stocks. LTCG is now taxable at 12.5 per cent against 10 per cent earlier and STCG at 20 per cent (15 per cent).

For debt funds, there is no change, it remains taxable at MSL. However, there is a nuance in one segment here. Till July 22, 2024, if you had invested in a debt fund growth option till March 31, 2023 and redeemed after a holding period of three years, it was taxable at 20 per cent after the benefit of indexation. Those debt fund investments, made till March 31, 2023 — when you redeem after July 23, 2024, provided you have held for two years, will be taxable at 12.5 per cent straight, without the benefit of indexation. To clarify, investments made in debt funds since April 1, 2023 are taxable at MSL.

REITs, InvITs

REITs and InvITs required a holding period of three years earlier, to be eligible for LTCG, which used to be 10 per cent. Now, the holding period for all listed instruments is cut to one year for the LTCG rate of 12.5 per cent.

The lower holding period is a positive.

Conclusion

Now, there is uniformity in taxation rules: holding period is one year for listed and two years for unlisted instruments/physical investments. Indexation has been removed except for real estate bought till July 22, 2024.

(The writer is a corporate trainer (financial markets) and author)

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