Budget 2024: Should I change my return expectations after the change in capital gains tax?

Over the last few days, many readers have asked us if the

ey should change their return expectations due to the change in capital gains tax announced in budget 2024.

The most significant negative changes are:

• The long-term capital gains for equity investments have increased from 10% to 12.5%. The increase in tax-free limit to Rs. 1.25 lakhs from Rs. 1 lakhs is relatively insignificant over the long term. Also, see why we do not think much about tax harvesting. Tax harvesting: Should I book Rs. 1 Lakh profit each year to lower Equity LTCG Tax?
• The change in long term capital gains tax for debt investments made before 1st April 2023 from 20% with indexation to 12.5% without indexation. In many cases, this would result in higher taxes for both debt funds and real estate sales, as shown here:
  • How much return should I get from real estate sales to benefit from 12.5% tax without indexation? (Budget 2024)
  • Absolute returns have to be nearly three times higher than inflation for a 12.5% tax to be beneficial!
• The budget also has bad news for funds holding neither 65% equity nor 65% debt. These long-term gains will also be taxed 12.5% without indexation instead of 20% with indexation (if they previously held more than 35%) equity.

When equity LTCG became taxable in 2018, we suggested that investors remove a full 1% from their return expectation after ensuring their pre-tax expectations were reasonable.

For now, we shall stick to this and suggest investors not expect more than 12% pre-tax. Ideally, they should invest like they won’t get more than 10% pre-tax.  As the country develops and more investors turn to equity, returns will come down, and taxes will go up! For now, 10-12% pre-tax will work.

For debt investments, 7% pre-tax and 6% post-tax should still be reasonable.

For the time being, no other change is necessary.

Nothing is permanent: We must recognize that these rule changes are not permanent. Like everyone else, the ministry also lives and learns and is subject to pressures from financial product manufacturers or political changes so they could bring back indexation benefits in the future or lower the tax. Or, as many fear, they could increase the tax or, worse, set it to as per slab.

Regardless of the tax, we should never increase or decrease risk in the portfolio in any manner only to lower tax outgo. So, no snap reactions, please. Yes, the higher tax hurts, but we should be able to accumulate enough for our goals reasonably. Let us make calm decisions and revise return expectations if necessary in future. Also see, How should I modify my investment strategy after budget 2024?

Read more from our budget 2024 coverage

• Budget 2024: FAQ on capital gains taxation
• Budget 2024: How Share buybacks will be taxed from 1st Oct 2024
• Additional “tax savings” required to use the old tax regime after budget 2024
• Budget 2024: Upcoming changes to the National Pension Scheme
• Budget 2024 Capital Gains Taxation Guide
• Budget 2024: How will fund-of-funds be taxed from July 23rd 2024?
• Budget 2024: New Tax Regime vs Old Tax Regime Calculator: Check which is better