Here is what we are doing to efficiently manage investments after accounting for the budget changes.
The Positive impacts:
– Investments in Gold funds qualify for LTCG (Long Term Capital Gain) at 12.5% after 2 years of holding. Gold is an important asset class in a globally uncertain environment and should have a 10-15% portfolio allocation.
– International investments through mutual funds also qualify for LTCG at 12.5% after 2 years of holding. This is a big relief for investing outside India to diversify the portfolio. 5-10% allocation to South East Asian economies can be considered due to valuation comfort.
– Debt funds investment made before 31 Mar 2023 will qualify for LTCG after two years and be taxed at 12.5% without indexation. Before the budget, the investments in debt funds qualified for LTCG at 20% with indexation benefit after 3 years of holding. Although the effective tax rate has gone up marginally, the holding period for LTCG has come down.
In the last year’s budget, the indexation benefit for gold funds was removed and it was subjected to be taxed at a slab rate.
The negative impacts:
– LTCG on equity investments has gone up from 10% to 12.5%. STCG has gone up from 15% to 20%. This impacts the returns of PMS/AIF products which have to pay capital gain taxes on every transaction, unlike mutual funds.
– Increased STT on future and options to impact returns of arbitrage funds. As per our discussions with one of the top AMCs, the impact could be 12-18 bps/annum but more clarity will appear after a month.
– Capital gains on Debt MFs investments after 31 Mar 2023 will continue to be taxed at slab rate.
Short-term debt investments should ideally be moved to arbitrage funds to maximize post-tax returns. Transactions in international funds can be looked at without worrying about taxes.
Although increasing taxes on CG is negative for investors, the Govt’s intent to bring parity across asset classes and simplify the tax structure is positive.
Originally posted on LinkedIn: www.linkedin.com/sumitduseja
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