Tax on Date Fund: It seems that the dream of those who invest money in debt mutual funds to create a retirement fund will be shattered. The government has abolished indexation and it has been implemented since a long time. It is clear that now your money is going to be affected a lot in the name of savings.
Tax on Date Fund: It is a general rule of income tax that it is always applied to future plans. If you have made an investment earlier, then it should not be applied on it, but in the Budget 2024 presented on July 23, the government abolished de-indexion i.e. exemption 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 remained around the property. But, do you know that this new rule will also weaken your old age support. 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 a year back. 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 get hardly 7 to 8 or at the most 9 percent return. This means that you will hardly get 10 percent annual return on this fund. Despite this, relying on the power of compounding, this fund has the ability to create good corpus in the long term. This is the reason why most people prefer debt mutual funds to create 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 20 percent long term capital gain tax will have to be paid directly. Well, it was fine till here that brother, 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 ended 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 see this calculation.
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, we take you just 3 years ahead i.e. to the year 2026. If you get a return of just 7% during this period, then with compounding your amount will increase to Rs 12,25,043. This means you earned a capital gain i.e. return of Rs 2,25,043. If inflation increased at the rate of 4% during this period, then with indexation you will actually have a taxable return of only Rs 1,00,179. On this, you pay 20% 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!
