In this way the stick of old age will become weak! Tax increased by 40% on retirement money

New Delhi. The general rule of income tax is that it is always applied on future plans. If you have made any investment earlier, then it should not be implemented on it, but in the Budget 2024 presented on July 23, the government abolished de-indexation i.e. inflation-related exemption on all types of capital gains. After the budget, the opposition also created an uproar over it, but most of the talk revolved around property. But, do you know that this new rule will also weaken the stick of your old age. Why and how, let us explain to you in very simple language and calculations.

According to Live Mint, first let us remind you what changes the government has made on capital gains. For this let’s go back one 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 7 to 8 or at most up to 9 percent returns. 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 generate good returns in the long term. This is the reason why most people prefer debt mutual funds to create their retirement fund.

Also read – Just a few more months, then this special government savings scheme for women may be closed, interest is more than bank FD

What was the change?
The continuation of preference for debt mutual funds was till the year 2023, but in last year’s budget, the government ended the benefit of indexation on this category. This means that people’s retirement savings took a direct hit. Earlier, 20 percent tax was levied on long-term returns on this category of mutual funds, but there was also a rebate on the returns relative to inflation. Due to which the effective tax remained quite low. The government had said that if you invest in this category after 2023, you will not get the benefit of indexation. This means paying 20 percent long term capital gains tax directly. Well, till now it was fine that now we will not invest any money in this. But, the real problem started now.

what happened in 2024
In the last one year, people have made up their mind 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 gains tax from 20 percent to 12.5 percent. This will also affect the money invested in this fund before April 1, 2023. Visually, 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.

Calculation will blow your mind
Suppose you invest Rs 10 lakh in a debt mutual fund on March 31, 2023, which will help you create a huge corpus by retirement. Instead of taking you till retirement, we take you only 3 years ahead i.e. till the year 2026. During this period, if you get a return of only 7 percent, then with compounding your amount will increase to Rs 12,25,043. This means you earned capital gain i.e. return of Rs 2,25,043. If inflation increases at the rate of 4 percent during this period, then with indexation your actual taxable return will be only Rs 1,00,179. On this you pay 20 percent direct long term capital gains tax i.e. Rs 20,035.80.

But, after indexation is ended in Budget 2024, you will have to pay 12.5 percent tax on the entire capital gain. This means Rs 2,25,043 plus 12.5% ​​tax which will be Rs 28,130. The amount of increased tax on you will be Rs 8,095. Now if we convert it into percentage, the tax burden has directly increased by 40 percent. This math is only after 3 years of investment, just imagine what would happen if you prepared a retirement fund for 30 years. The old man’s stick has become weak!

Tag: budget session, business News, income tax, mutual fund