New Delhi. It is a general rule of income tax that it is always applied on future plans. If you have made an investment earlier, then it should not be applied on that, but in the Budget 2024 presented on July 23, the government abolished the exemption given in relation to inflation on all types of capital gains.
After the budget, the opposition also created a ruckus on this, but most of the talk was around property. But, do you know that this new rule will also weaken your support in old age. Why and how, let us explain to you with very simple language and calculation.
According to Live Mint, first let us remind you what the government has changed on capital gains. For this, let us take you back a year. In the year 2023, the government had ended the benefit of indexation on the most preferred mutual fund category for retirement. We are talking about debt mutual funds, on which you hardly get a return of 7 to 8 or at the most up to 9 percent. This means that you will hardly get an annual return of 10 percent on this fund. Despite this, relying on the power of compounding, this fund has the ability to create good special corpus in the long term. This is the reason why most people preferred debt mutual funds to prepare their retirement fund.
What changed?
The preference for debt mutual funds was till 2023, but in last year’s budget, the government ended the benefit of indexation on this category. This means that people’s retirement savings were directly affected. Earlier, 20 percent tax was levied on the long-term returns on this category of mutual funds, but there was also a discount on returns relative to inflation. Due to which the effective tax was very low. The government had said that if you invest in this category after the year 2023, then you will not get the benefit of indexation. This means that you will have to pay 20 percent long term capital gain tax directly. Well, it was fine till here that we will not invest money in it anymore. But the real problem started now.
What did you do in 2024?
In the last one year, people have decided that let’s not invest money here. But, in the 2024 budget, the government abolished indexation on all types of capital gain investments and reduced the long term capital gain tax from 20 percent to 12.5 percent. This will also affect the money invested in this fund before April 1, 2023. On the surface, you feel that the government has reduced the tax rate, but when you see it with indexation, you will be shocked. How, just look at this calculation.
The calculation will blow your mind
Let’s assume that you invested Rs 10 lakh in a debt mutual fund on March 31, 2023, thinking that you will be able to create a huge corpus by retirement. Instead of taking you to retirement, let us take you just 3 years ahead, i.e. to the year 2026. During this period, if you get a return of even 7 percent, then with compounding, your amount will increase to Rs 12,25,043. This means that you earned a capital gain of Rs 2,25,043. During this period, if inflation increased at the rate of 4 percent, then with indexation, you will actually have a taxable return of only Rs 1,00,179. On this, you pay 20 percent direct long term capital gain tax, i.e. tax of Rs 20,035.80.
But, after indexation is abolished in Budget 2024, you will have to pay 12.5 percent tax on the entire capital gain. This means that Rs 2,25,043 will be taxed at 12.5 percent, which will be Rs 28,130. The increased tax that comes on you will amount to Rs 8,095. Now if we convert it into percentage, the tax burden has increased by 40 percent directly. This math is after investing for only 3 years, just imagine what will happen if you prepare a retirement fund for 30 years. The support to get old has become weak!
