Retirement is a crucial period in one’s life, and it is important for individuals, whether they are self-employed or salaried employees, to prioritise financial security in their golden years. Many financial experts emphasize the importance of tax saving in financial planning for individuals of all income levels, including senior citizens. It is essential to consider the capital gains tax implications of various investment vehicles, such as mutual funds, debt funds, and stocks when planning for retirement.
The 2024 Budget has increased capital gains taxes for short-term and long-term capital gains on different capital assets. Additionally, the Budget has revised the holding periods for short-term and long-term capital gains. This change will have implications for your mutual fund (MF) investments.
Finfluencer and Wisdom Hatch founder Akshat Shrivastava in a post on X noted that that investors are making investments and SIPs today, thinking the capital gains tax will be at 12.5% forever. He wondered that the tax rate might not be the same after 10 years or so. If capital gains taxes are increased that can heavily affect the final retirement corpus.
Shrivastava noted: “1) You are doing your SIPs today, thinking capital gains tax will stay at 12.5%
2) But:-
15 years ago, it was 0
1 year ago, it was 10%
Now, it is 12.5
3) Who knows what this tax rate would be in 10 years’ time?
The fact is: if you are a hard-working honest person, your chances of building wealth in India is close to 0
You can do your SIPs for life, working 70-70 hours a day.
The growth on your portfolio might get offset by = taxation + inflation.”
He also gives solutions to those who are keen to build a robust corpus.
Shrivastava said: If you wish to build real wealth, understand these powerful trends. And, take actions accordingly. The first key step for wealth building is: if you have more than 50-60L of operation income a year, get tax structured efficiently.”
Capital gains taxes
In order to qualify for short-term or long-term capital asset status, there are two holding periods to consider: 12 months for listed securities on Indian stock exchanges and 24 months for all other asset classes. Effective July 23, 2024, listed securities will be classified as long term if held for more than 12 months, while all other asset classes will need to be held for more than 24 months to be considered long term.
Under the new regulations, long-term capital gains (LTCG) will be subject to a uniform tax rate of 12.5% across all asset classes. The previous indexation benefit for investors has been eliminated in Budget 2024. Prior to these changes, certain assets were taxed at a LTCG rate of 20% with indexation and 10% without indexation. The revised LTCG tax rate without indexation came into effect on July 23, 2024.
Short-term capital gains from stocks, equity funds, and units of business trust (InvIT and REIT) will now be subject to a 20% tax rate, up from the previous 15%. This change, effective from July 23, 2024, does not apply to other assets.
Additionally, profits derived from debt mutual funds, debt ETFs, market-linked debentures, unlisted bonds, and debentures will not be considered short-term capital gains, regardless of how long they are held.