How should I change my portfolio to lower tax after budget 2024?

A reader says, “I’m 45 and have reached 60:40 Equity: Debt portfolio. I have 15 more years of service and don’t plan to take Early retirement. My target corpus has not yet been reached. I have invested in NIfty 50 and NIfty Next 50 for equity, PPF, NPS, and gilt funds for long-term equity and debt”.

“Now, looking at the taxation and my current Equity Debt allocation, is it prudent to invest my future investments in aggressive hybrid funds (as per Plumb Line) for the next 7-10 years so that I don’t have to worry about balancing the portfolio and taxation related to it”.

Some of the critical aspects of budget 2024 that will affect no-so-rich investors are:

• Tax on equity investments has increased from 10% to 12.5%. The increase of the Rs 1 lakh tax-free limit to Rs. 1.25 is largely inconsequential.
• Debt mutual fund taxation. See more: Budget 2024: FAQ on capital gains taxation
  • Investments before 1st April 2023.
    • Redeemed between 1st April 2024 and 22nd July 2024: LTCG period is 3Y and taxed at 20% with indexation. STCG (< 3Y) is taxed as per slab.
    • Redeemed after 22nd July 2024: LTCG period is 2Y and taxed at 12.5% without indexation. STCG (< 2Y) is taxed as per slab.
  • Investments after 1st April 2023.
    • Always taxed at slab rates regardless of when redeemed.
• Share buybacks will be taxed as a dividend instead of being tax-free (the company was paying 20% tax)
• The tax on international FOFs, gold/silver funds, physical gold, unlisted bonds, and overseas equity/bonds has been reduced from either the slab rate or 20% to 12.5%. See: Budget 2024 Capital Gains Taxation Guide
• NPS Employer contribution has a deduction of up to 14% in the new tax regime
• New tax regime slabs have been made more favourable, and it is harder for the old tax regime to beat them. See Budget 2024: New Tax Regime vs Old Tax Regime Calculator: Check which is better.

Specific recommendations to the reader’s question. 

The short answer is no. An aggressive hybrid fund is just as risky as an equity fund. It would be a terrible mistake to abandon the cushion of fixed income and increase portfolio risk only because it entails lower taxes. Please treat aggressive hybrid funds as 100% equity funds.

Please continue as usual as per your set asset allocation schedule, keeping in mind that equity allocation has to be gradually lowered well before your retirement date.

Our recommended fixed-income options for long-term goals only

• PPF (tax-free)
• Arbitrage Mutual Funds (taxed like an equity fund, can be used goals more than 1Y away but do not expect much returns). It is more useful for shifting from equity as the goal deadline nears, especially for non-retirement goals.
• Parag Parikh Conservative Hybrid Fund (taxed like a debt fund)
• Gilt Funds, Corporate Bond Funds (taxed like a debt fund)
• Parag Parikh Dynamic Asset Allocation Fund (contains significant equity, not for everyone; do not use unless you have a large corpus or experience; taxed like other funds). See: Budget 2024 Capital Gains Taxation Guide

We have the following generic recommendations for all readers.

• Get rid of the tax-saving mode and choose the new tax regime.
• Equity investing is essential for long-term goals. So do not fear the higher tax. Create a proper financial plan with a clear asset allocation schedule and stick to it like a robot.
• Avoid share buybacks if you are into direct equity (not necessary).
• Just because some products (as mentioned above) are taxed favourably now, do not go overboard on them. The more types of products you have in your portfolio, the harder it becomes to manage them. There is no need for any additional goal exposure. You do not need international FOFs, etc.
• Do not lock up any or more of your money in NPS just because you have to pay less tax. Stay away from Corporate NPS, if You Wish to Retire ASAP!

A change in taxation should never change your core strategy. We will have to accept the higher tax and move on. Focus on the big picture – becoming multi-crorepatis.