Union Budget 2020: What is the Impact on Investors?

The government has not addressed the investors’ request in yet another budget. The Association of Mutual Funds in India (AMFI) had released 17 wishes out of which none has been fulfilled. The investors had several expectations from this budget. Also, this budget was considered significant in addressing numerous economic issues. 

The government has announced a new tax regime which has reduced tax rates. However, you should note that most tax deductions and exemptions under the old regime will no longer be available under the new tax regime. Hence, it would help if you calculated your taxes in both the systems before picking one. 

If you decide to continue following the old tax regime, then you still have an option of saving taxes under Section 80C provisions. You can still take advantage of ELSS, which offers the dual benefit of wealth accumulation and tax deductions. However, if you opt to follow the new tax regime, then you must ensure to invest enough for your future. 

Coming to the budget amendments concerning the investors, the FinMin has yet again let them down by not abolishing the tax on long-term capital gains (LTCG). There are no changes made to the definition of holding period for equity holdings. Investors still have to pay securities transaction tax (STT) along with long-term capital gains tax. 

Also Read: Union Budget 2020 Expectations: Tax Relief for Investors

The government has removed the dividends distribution tax (DDT). This means that the companies need not pay any tax before distributing the profits to their shareholders. Instead, the dividends are now taxed in the hand of investors as per the income tax slab they fall under. 

Earlier, the companies were paying dividends distribution tax at the rate of 11.6% for equity funds and 29.1% for debt funds. Now, the dividends will be taxed in the classical system. If you fall into 10% or 20% income tax slab, then you will gain on dividends from debt and equity funds. But, if you are in 30% tax brackets, then you will pay more tax on dividends. 

Dividends are no more attractive when it comes to equity funds. Hence, investors should go for the growth option and redeem their investments periodically through systematic withdrawal plans (SWPs). Redemption through SWPs is known to be more tax-efficient than a one-time redemption. 

Despite the presence of LTCG tax and STT, you should still invest in mutual funds. If you are to follow the old tax code, then ELSS is the best tax-saving option under Section 80C. If you opt to follow the new tax regime, then you can invest in open-ended debt or equity funds to accumulate considerable wealth over time. 

Mutual funds must be utilised by individuals to plan their future. They are one of the few investment options that have the potential to offer inflation-beating returns. The power of compounding, in combination with a long-term investment horizon, will help you accumulate a considerable amount of money in the long run.

For any clarifications/feedback on the topic, please contact the writer at vineeth.nc@cleartax.in.

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