Income Tax Budget 2024: Dos and Don’ts for individual taxpayers

The Budget 2024 has introduced significant taxation changes that impact individual taxpayers. It's crucial to understand these changes to make informed financial decisions rather than impulsive ones. Here are some key dos and don’ts to guide you through the new tax landscape.

General Financial Principles

Do Maintain Disciplines: Regardless of tax changes, continue to follow basic budgeting, savings, and asset allocation principles.

Don’t React Impulsively: Avoid making knee-jerk decisions based on tax announcements.

Equities and Equity Mutual Funds

Do Invest in Equities: Despite the increase in Short-Term Capital Gains (STCG) tax from 15% to 20% and Long-Term Capital Gains (LTCG) tax from 10% to 12.5%, equities remain a strong wealth-building asset.

Do Utilize LTCG Exemptions: The exemption limit for LTCG from listed securities has increased to ₹1.25 lakhs from ₹1 lakh. Make sure to utilize this benefit annually.

Don’t Shift Away from Equities: The tax increase should not deter you from investing in equities or equity mutual funds.

Don’t Opt for Short-Term Investments: The widened gap between LTCG and STCG taxes incentivizes long-term investments.

Arbitrage Funds and Fixed Deposits

Do Compare Investment Options: With STCG tax on arbitrage funds increased to 20%, compare post-tax returns of arbitrage funds and fixed deposits to make better investment choices.

Futures and Options (F&O)

Do Reconsider F&O Trading: Higher Securities Transaction Tax (STT) rates on Futures (0.02%) and Options (0.1%) suggest reconsidering frequent trading, especially for inexperienced investors.

Real Estate

Do Evaluate Real Estate Investments: The LTCG tax on real estate sales after 2 years has reduced to 12.5%, but the loss of indexation benefits makes this advantageous only for properties bought before 2001 or those with annual gains exceeding 10%.

Don’t Over-invest in Real Estate: Consider diversifying investments if you are heavily invested in real estate, especially if rental yields are low.

Do Explore Financial Investments: Financial investments, particularly equities and mutual funds, often provide better returns and liquidity compared to real estate.

Gold

Do Limit Gold Investments: With customs duty on gold reduced to 6%, maintain a balanced portfolio with 5-10% in gold.

Do Consider Sovereign Gold Bonds: For long-term holdings, sovereign gold bonds offer 2.5% annual interest and tax-free capital gains after 8 years.

National Pension System (NPS)

Do Maximize NPS Contributions: The contribution limit for private sector employees has increased from 10% to 14%, offering greater retirement benefits and tax exemptions.

Do Consider Equity Fund Option: NPS can yield 10-12% returns through its equity fund option, making it an excellent retirement investment.

Moving Towards the New Tax Regime

Do Prepare for Changes: The budget signals a shift towards the new tax regime, which does not offer exemptions like the old regime. Maintain the discipline of investing regardless of the regime in effect.

The Budget 2024 presents an opportunity to reassess and realign your personal finances, enhancing your financial wellness in response to the new tax changes.