Budget 2024 announcements concluded and like every year I have to check if it affects me. This budget was a major headache for my calculations. It doesn’t affect how I invest but making the tax calculations will take a lot of time. There were some bad surprises but that is how budget works. You just have to work with it. For one, the short term capital gains tax was increased from 15% to 20%. Indexation benefits have been removed. A big blow for real estate and long term debt mutual funds (in certain cases). There was some good news in the way of changing tax slabs for new regime and increasing standard deductions, but neither of them apply to me.


Since 2020, I have been writing about how the budget affects me. You can read the past reports below:


I won’t be covering all the details about the budget announcements. I am sure you can find all you need from any news you follow. I want to cover the announcements that affects my financial plan in retirement.


Let me start with the only good news for me which was the increase of tax free limit of long term equity capital gains. In the past it used to be Rs. 1 lakh. Now it was revised to Rs. 1.25 lakhs. Hardly meaningful, but still it is something. What that basically means is that any time I have long term capital gains in equity mutual funds, I can offset up to Rs. 1.25 lakhs before I start paying capital gains tax. This means I can do a little bit more of capital gains harvesting going forward.


From there on, it is bad news after bad news :). The short term capital gains tax on equity has been increased from 10% to 12.5% without indexation benefit. Just a few years ago, the tax used to be 0%, then it went to 10% and now it is 12.5%. Unfortunately, there was no grandfathering clause. This means any kind of rebalancing of my asset allocation has become that much more expensive.


Next, the long term capital gains tax on debt mutual funds has been reduced to 12.5% which initially seems like good news, but unfortunately they have done away with indexation benefit. The worst part is there is no grandfathering. For those of you who don’t know, back in 2023 budget, any capital gains arising due to investments made into debt mutual funds after March 31, 2023, will be added to your income and taxed at applicable tax slab. However, if you invested before March 31, 2023, your long term capital gains were taxed at 20% with indexation. Now, all those long term capital gains will be taxed at 12.5% without indexation.


The same thing applies for real estate too. No more indexation benefit. Although this does not affect me right away, it may come to bite me in the future when I try to sell my house. Who knows what more changes will come by the time I sell. As it stands, unless you have a very old property, this new tax is going to cost you more. I don’t understand why the indexation option was removed. It helps assets keep pace with inflation and any tax you pay should be only on the capital gains after accounting for inflation. Anyway, it is what it is.


For me the biggest problem happened to be the complicated calculations that I need to make to figure out how to maximize my capital gains while minimizing taxes. I wrote an app which tells me how much I need to sell from which asset class to maximize my capital gains for the financial year. I update the app every year with any required changes after budget speech. But this time, it is a huge mess.


According to the announcements, the new tax is applicable right from the budget speech day, i.e. July 23, 2024. So any transactions made from April 1, 2024 will have the old tax applicable and any transaction made after July 23, 2024 will have the new tax. In normal budgets this was not a problem since the budget happens on February 1 of the year and the new tax laws will be applicable from April 1 of the year which matches with the start of the next financial year. This time, since the February budget was an interim budget due to elections, we are in this pickle.


So my app now has to manage for all transactions that happened between April 1 to July 23 differently and then all transactions after that differently. In addition to all other complications due to previous budgets. So tax planning is becoming a bit of a pain for me this year.


Equity MF

This is how capital gains need to be calculated for equity mutual funds.


Long term

If you purchased equity MFs on or before January 31, 2018 and sold them later for long term capital gain (> 1 year), then they are treated differently because you have to use the higher NAV of January 31, 2018 and purchase date NAV when calculating cost of acquisition.


If you sold any time before July 23, 2024 for a long term capital gain then the applicable tax rate is 10% after deducting Rs. 1 lakh (according to my understanding).


If you sold any time on or after July 23, 2024 for a long term capital gain then the applicable tax rate is 12.5% after deducting Rs. 1.25 lakh.


Short term

If you sold any time before July 23, 2024 for a short term capital gain then the applicable tax rate is 15%.


If you sold any time on or after July 23, 2024 for a short term capital gain then the applicable tax rate is 20%.


Debt MF

This is how capital gains need to be calculated for debt mutual funds.


Long term

If you purchased before April 1, 2023 and sold them after 3 years, but before July 23, 2024 then the applicable tax rate is 20% with indexation.


If you purchased before April 1, 2023 and sold them after 2 years, but after July 23, 2024 then the applicable tax rate is 12.5% without indexation.


If you purchased on or after April 1, 2023 and sold them after 2 years, then the gains are added to your income and taxed according your tax slab which again differs based on whether you opt for old tax or new tax code.


Short term

Short term capital gains have always been added to your income and taxed according your tax slab which again differs based on whether you opt for old tax or new tax code.


What a mess. My app has to figure out the optimal path and decide if I should use old tax or new tax based on all this information. Whether I should sell debt MFs or equity MFs for short or for long term gains all to maximize gains while minimizing taxes. So it is a pain to update the code. I didn’t yet fully change my code hoping that the government may change their stance on when the date is applicable. Not holding my breath though. Just imagine if I had other types of investments such as gold MFs, international MFs etc which are treated differently than debt and equity MFs.


The only good aspect is that there is slightly less confusion about the duration for long term. It is either 1 year for equity or 2 years for the rest of them. Likewise, the tax for most long term gains is a flat 12.5% without indexation except for debt MFs which are taxed at slab rates. Similarly, tax for most short term gains is slab rate except for equity which is taxed at 20%.


While the taxation is simplified a little bit, I think there is more scope for improvement which I assume will happen in the next few upcoming budgets. For example, duration for all long term capital gains might be changed to 2 years instead of a mix of 1 year (for equity) and 2 years (for the rest). Next, the tax rate may become uniformly 12.5% for all long term gains instead of a mix of slab rates (for debt MFs) and 12.5% (for the rest). All short term capital gains may be taxed at slab rates instead of a mix of 20% (for equity) and slab rates (for the rest). Finally I think the Rs. 1.25 lakhs discount for long term equity capital gains will be abolished. Lets wait and see.