Romila Nijhawan, Principal Partner, Nuvama Private on the Budget and its impact on investments
Romila Nijhawan, Principal Partner, Nuvama Private on the Budget and its impact on investments
Hi, good afternoon everyone. I’m honoured to be here, delighted actually, and this is not the first time that I’ve been to the Rotary Club of Bombay. I was here a couple of months back when Nuvama had the opportunity to have our guest speaker Mr. Ajay Vora who addressed the crowd. Just to step back before we start, I must say that for all the work done by the Rotarians across the country, I’ve seen some of the CSR projects and we’ve also seen some of the work done in villages for a lot of people and I must say I deeply respect that.
So without wasting too much time, I will move on towards the budget, the changes, and the impact it has had on investments. Please feel free to stop me and ask questions if you think something needs to be explained. And for all the CAs here in this meeting, I would please ask them to excuse me because I’m not going to be using any technical jargon as it only becomes more confusing for most of us.
This budget, which was presented on July 23rd, 2024, like a lot of other budgets presented by different finance ministers, had a lot of tweaks on the capital gains side. In fact, there was an interesting article I read a couple of days ago about the introduction of capital gains. It was first introduced in 1992. That was the first time capital gain was introduced. We’ve also witnessed history because in July 2024, indexation was removed. So that is also a historic event. To a large extent, it has rattled a lot of nerves. But there are certain good things and certain not-so-good things. We will discuss all of these here.
I will not go into personal income tax as it does not impact investments. It does impact taxation, but not investments.
In terms of the capital gains tax, two basic changes have been made: the holding period rationalisation and the change in rates. For the holding periods, it has been simplified: for all listed securities, the holding period is now 12 months. Units of equity-oriented mutual funds and units of business trusts are all 12 months, and after that, it is 24 months. Once I finish reading through the slides, I will take you through the exact impact of these capital gain changes on certain investments because that is what is more useful for everybody here.
Regarding the rates, the long-term capital gain for all assets has been changed to 12.5%. The short-term capital gain tax for listed securities is now 20%, which basically implies all your units of equity-oriented mutual funds and business trusts. For everything else, the applicable rates of assets are your marginal slab rates. I’ll take you through this, so don’t get rattled by the technicalities. The indexation benefit has been removed.
Let’s talk about the changes due to the holding rates, holding period, and rates, and their impact on different assets.
For all listed securities, whether we are talking about direct equities, REITs, INVITs, equity-oriented mutual funds, or equity ETFs, the rates have been changed to 20% for short-term capital gains and 12.5% for long-term capital gains. The most significant change is that your short-term capital gains rates have moved from 15% to 20%. So what are the categories of funds that become attractive or unattractive due to the taxation?
Arbitrage funds, which were used by investors to park short-term money, are actually equity-oriented funds due to their taxation. They were used mostly by corporates and individuals due to the tax arbitrage. Those funds get impacted because people used to park money in arbitrage funds, pay 15% tax, and then get out. But now, due to the change in budget taxation, the rates have become 20%. So, on arbitrage funds, there is a bit of a squeeze. However, one category that becomes attractive due to this change is REITs and INVITs. All your listed REITs and INVITs, due to the holding period change to 12 months, become attractive.
Earlier, the holding period was much longer. That holding period has been condensed to 12 months. Therefore, your listed REITs and INVITs become extremely attractive at this point in time. Also, all your equity-oriented mutual funds, whether balanced advantage funds or balanced funds, anything with more than 65% equity, continue with the same taxation of 12.5% long-term and 20% short-term.
For unlisted equity shares and unlisted REITs and INVITs, the taxation has changed in terms of the holding period and the rates. Unlisted equity shares now have short-term taxation at your marginal slab rate, long-term taxation at 12.5%, and a holding period of 24 months. From an unlisted equity share perspective, a lot of shares traded on unlisted equity sites have become attractive due to the taxation. The long-term taxation on unlisted equity shares with a 24-month holding period is now 12.5%. As an asset class, it has become quite attractive.
For listed debentures, bonds, zero-coupon bonds, and sovereign gold bonds, they all fall into a similar category. The short-term capital rate is your marginal slab rate, long-term capital gains is 12.5%, and the holding period for listed debentures, bonds, zero-coupon bonds, and sovereign gold bonds is 12 months. For sovereign gold bonds, this is a significant change in terms of the holding period. If you hold that asset for about 12 months and sell it after 12 months, it attracts long-term capital gains. Earlier, you had to hold that asset for 36 months.
For unlisted debentures and bonds and market-linked debentures, market-linked debentures used to be very favourable until before April 2023 due to the tax arbitrage. That arbitrage was eliminated in this budget. For MLDs, there is no change; they remain at your marginal slab rate. Therefore, MLDs in the market have lost favour completely. Most MLDs that trade today do so at a discount because of the marginal tax rate, with TDS deducted at the end of maturity. So, if someone is buying an MLD with a residual maturity, the TDS is paid from the face value up to the maturity value. Therefore, it becomes quite unattractive for clients unless there is a significant discount available because it impacts cash flows.
Next, let’s discuss immovable properties and physical gold. There is a lot of interest in immovable property. Your indexation benefit has been removed. On the immovable property side, your holding period is 24 months. Your taxation on the short-term side is your marginal slab rate. However, the long-term capital gains tax has become 12.5% without indexation, and this has implications.
I will move to immovable properties with an example to show different scenarios. With these scenarios, you will understand where it benefits us and where it hurts us. Let’s take an example of someone who bought a property in 2022. The way this works now is that if you bought a property in 2022 and your purchase price was 4.5 crores, and the sale year is 2024, selling the property for 6 crores, what happens because of the budget?
The budget now states that if you bought a property before 2001, you can take the fair market value of 2001, 1st of April 2001, as your cost. But in this case, we are in 2022, so this fair market value does not apply. We have to take the cost as 4.5 crores and the sale price as 6 crores. So, your post-budget long-term capital gain is 6 minus 4.5, which is 1.5 crores. On this 1.5 crores, you end up paying 12.5% as your LTCG due to the 24-month holding period, amounting to about 19 lakhs (excluding surcharge and cess).
Let’s consider the same property with the same example if cost indexation was applicable. The cost of indexation for a property bought in 2022 at 4.5 crores goes up to 4.9 crores. You sold the property for 6 crores. The difference in the pre-budget scenario is about 1.1 crore, and on this 1.1 crore, you ended up paying 20% tax, resulting in almost 22 lakhs. This example shows you are better off in the post-budget period. If your property has appreciated more than 10%, you are better off in the new regime; if not, the old regime is better.
Now, let’s take an example of someone who bought a property in 1985. If you bought the property in 1985 and the purchase price was 40 lakhs, with the sale year as 2024, and the sale price as 4 crores in 2024, you have the option of choosing either the indexed cost or the fair market value on 1st April 2001 as the cost. Clearly, the indexed cost is higher at 4.4 crores. Therefore, your sale proceeds are 4 crores minus 4.4 crores, resulting in a loss of about 40 lakhs pre-budget. Post-budget, you take the fair market value of around 1.2 crores and pay taxes at 12.5%, amounting to about 35 lakhs. This implies that for a property bought in 1985, you are better off with the indexation gain, while for a property bought in 2022, the value may or may not have appreciated enough.
Finally, I will discuss the buyback of shares because many of us submit shares in buybacks. Prior to the budget, the tax on buybacks was paid by the company. After the budget, buybacks are treated as dividend income with repercussions. I will give an example to clarify the impact of this taxation.
So, let us say that I bought 100 shares at 50 rupees. For example, we bought 100 shares at 50 rupees. So, the total cost that was paid for this was about 5000 rupees. Now, let us say the company in this calendar year says that there is a buyback and I am able to submit 40 shares out of the 100 shares that I bought. Let us say the price for the 40 shares which the company has announced is 80 rupees. My cost of acquisition was 50 rupees, but the company is taking it back at 80 rupees. So, the total consideration that I am getting is 80 rupees into the 40 shares of buyback. So, the total amount of 3200 that comes to me will be treated as a dividend. And dividend basically implies that this is your marginal slab rate. The loss that you bear because you had paid for the 40 shares, at a cost of 50 rupees per share, implies a loss of 2000 rupees that can be booked by you as a capital loss. Whether it is short term or long term will depend upon when you bought it. But what will happen here is that the dividend is treated at your marginal slab rate, but the maximum amount that you can save by treating the loss as a capital loss is 20%. And for most of us, the marginal slab rate is higher. It is because of this reason that a lot of companies have announced their buybacks right now. After the budget, a host of companies have announced buybacks because the provisions of the buyback become effective from the 1st of October 2025. There are also other criteria which have to be taken into account, such as one year should have passed and so on.
This is a major change. I must also mention here that for the buyback and for properties, there is a representation which has been made by the industry to the finance minister, and the provisions of the indexation and the buyback are being reconsidered. Whether it will happen or not, we do not know, but there are representations that have been made.
For most of us, people who are doing NPS, at least for a lot of corporate sector employees, a lot of us do our savings through the NPS. Earlier, for corporate sector employees, if we were saving through the NPS, we could save up to 10% of the basic salary. Now, those provisions have been modified, and it says that you can save up to 14% of your basic salary, but this change is available only to people who have opted for the new tax regime. If you have not opted for the new tax regime, the change is applicable only at 10%.
I’m coming back to the mutual funds part of the business because I’ve not covered all of it. So, I’m coming back to that slide. I was going step by step and therefore taking examples and coming to that. Now, the interesting part here is that in the budget, in April 2023, which is last year’s budget, there was a category of funds called specified mutual funds. These specified mutual funds were those that did not have 65% equity, resulting in taxation anomalies in certain sets of mutual funds because these were not treated as equity. There was no classification; because these were not equity, they were treated as debt, and therefore the debt provisions came into effect. But with this budget, specified mutual funds and non-specified mutual funds have been clearly distinguished, with different tax provisions for each.
Today, specified mutual funds are those where your debt holding is more than 65%. The tax is very simple: if you bought the debt fund after 1st April 2023 and have not sold it till date, the impact is that it is taxed at a marginal tax rate only. If you sold the funds before 23rd July 2024, which means you bought before 1st April 2023 and sold before 22nd July 2023, then the older provisions apply. But for anything bought after 1st April 2024 and still held, to be sold later in 2025, the marginal tax rate applies. Debt mutual funds as a category will need careful consideration.
However, compared to fixed deposits, there are still some benefits. For fixed deposits, your interest is accrued and you pay tax as the interest accrues. For debt mutual funds, your capital gain comes only when you sell the debt mutual funds. Secondly, you cannot make capital gains on FDs, but for debt mutual funds, in a scenario where you bought at a higher rate of interest and sell when the interest rates have decreased, there are incidents of capital gains that you can make.
Debt funds still have this distinct advantage. But because of the marginal tax rate impact, they have, to a certain extent, lost their charm. What can people do? People are now moving towards multi-asset funds. They want to avoid the marginal tax rate if they have held multi-asset funds for more than 24 months. If you’ve held multi-asset funds for 24 months and your holding is more than 65%, your marginal tax rate can be avoided.
Another attractive category is international funds and gold funds. These had lost their charm after the last budget because they were treated as specified mutual funds, with taxation and no indexation involved. But now, after this budget, international funds have become important due to a change in the holding period from 36 months to 24 months, and the long-term capital gains tax is now 12.5%.
These are some of the categories of funds that have seen changes. I’ve given examples of how tax changes have impacted property and buybacks, how arbitrage funds have lost their appeal, and how international and multi-asset funds have become more attractive.
There is a landscape in terms of assets that benefit and those that do not. However, asset allocation should not always be based on taxation. It has to be based on your life journey, the risks, and liabilities you foresee. Asset allocation has to be a function of that. You will take tax into account but not make decisions solely based on tax. There are far more things that I can cover, but for the time we have been given, I will end it here.
ROTARIANS ASK
Can you shed some light on whether it is beneficial for an angel investor to get into investments now?
Yes, it is because the taxes for angel investors have been reduced. Therefore, as an angel investor, it makes sense to invest. It is also beneficial for an investor, not only from the angel investing perspective but even if you are an ESOP holder. For example, if you were holding ESOPs in an unlisted company and you wanted to tender them as an offer for sale, it is beneficial today. So, on the angel investing side, it is beneficial, and even for ESOPs, it is beneficial.
Any broad picture, Romila? It seems that tinkering or just milking, the short-term capital gains rates have increased, indexation has been removed for long-term, STT has been increased. It’s kind of confusing the public by saying we are doing this and that, but it doesn’t give an overall kind of thrust that they want to focus on this or that. Any comments on that?
I think they have very clearly tried. So if you are talking about this budget specifically, the answer would be very different. But if you look at the broader picture, and track the budgets and events from the last few financial years, the budget has tried to plug most of the loopholes that existed. For example, the MLDs, which were there in earlier budgets prior to 2023, attracted a taxation of 10% if listed. But your MLDs attracted your marginal slab rate, and your debt funds had the benefit of indexation. This was a loophole available to investors, and people used it. The idea was to plug this loophole. Similarly, for this budget, the finance ministry has created separate categories for specified mutual funds and non-specified mutual funds. For all the listed securities that are equity-oriented, the category is separate. This, in fact, simplifies a lot of things. It has created some pain as far as indexation is concerned. But if the representation is made to the ministry and it is accepted, it is fine. Over time, for people investing from now onwards, it may not be so painful.
My question is about inherited property. What would be the procedure for indexation? How does this budget affect inherited property?
For all properties, all immovable properties, indexation has been removed completely. So even if your property was inherited, the cost of acquisition you can take at best is the fair market value as of the 1st of April, 2001. Therefore, it’s not as beneficial now as it was before.
I read somewhere, and maybe I was wrong, just want a clarification that for private limited companies, if you transfer shares now within the family, it will be taxed at the long-term or short-term capital gain tax. Is it better to give it now within the family or to do a monetary transaction for that?
If any transaction is routed through the stock exchange, that transaction will have the sale attached to it and will attract your short-term capital gains. If you are doing it through gifting, I think you should consult your CA.
My question is more between ELSS and PPFs. What would you suggest, especially for someone in their early 40s, if they want to look at long-term growth or anything like that, in terms of not only tax-saving purposes, but should one actually still invest the 1.5 in PPF or also shift between the two?
I would suggest equity-linked savings schemes (ELSS) for people who have the appetite for equity, who understand equity, and who want to invest for a longer period of time. ELSS is better for them. But you need to understand that market fluctuations will impact your ELSS investments. On the PPF side, you can put your money on the 1st of April every year, and you know it is safe and will earn tax-free interest rates.
REITs and INVITs, what exactly do they mean and how do they operate? Since you said they are more attractive now, can you shed some light on that?
REITs (Real Estate Investment Trusts) and INVITs (Infrastructure Investment Trusts) are interesting categories of asset classes that have developed over the last few years. Many people want to invest in properties and infrastructure assets, but it is difficult for a normal investor to understand the nuances of these assets and diversify at the same time. To address these issues, REITs and INVITs were created. REITs invest in real estate, such as commercial properties or malls. Investors get two types of income: annuity income from distributions and potential capital gains when the underlying properties are sold. REITs have become attractive as fixed income plus instruments.
Similarly, INVITs invest in infrastructure assets like renewable energy, roads, or highways. Investors earn money from tolls or PPAs signed for renewables or transmission lines, with annual distributions and potential capital gains when assets appreciate or are sold. This year’s budget has made REITs and INVITs more attractive by reducing the holding period for listed REITs and INVITs to 12 months, with taxation at 12.5% and 20%.
What products do you think you will develop, or people in your field will develop now, taking this budget into account? For example, MLDs, market-linked debentures – what new products would you develop?
That’s an interesting question. The answer will be different for different investors. Some categories of investments may lose favour, such as debt funds, because they are now taxed at marginal rates whether held for shorter or longer periods. On the equity side, unlisted shares have become attractive due to the 12.5% tax rate and a 24-month holding period. Multi-asset funds will also find favour due to better taxation compared to pure debt funds. It will require a combination of different assets and schemes. However, I will not rule out certain product types solely because of taxation, as taxation changes every year.