HNIs, review your portfolio post-Union Budget

The recent Union Budget 2024 has introduced significant reforms in capital gains taxation, reshaping the investment landscape for high networth individuals (HNIs). These changes warrant a thoughtful reassessment of investment strategies, although not necessarily a drastic overhaul. So, the question isn’t whether you should act – it’s how thoughtfully portfolio allocations are made going forward to capitalise on these changes.

The new tax regime, already in force, has leveled the playing field across various asset classes. While this shift doesn’t call for knee-jerk reactions, it does present an opportune moment for HNIs to review their portfolios. The key is to evaluate how recent market rallies have impacted asset allocations and whether adjustments are needed to align with individual risk appetites and financial goals.

The revised long-term capital gains (LTCG) tax now provides a more favorable environment for overseas investments, subject to RBI limits for mutual funds. International funds, previously subject to debt taxation, now enjoy parity with Indian equities, albeit with a 24-month holding period for LTCG classification, down from 36 months earlier. This change opens new avenues for global diversification, a strategy that HNIs should seriously consider.

In the real estate sector, the tax reforms have brought about a positive shift, aligning it with equity for taxation purposes. This simplification is particularly beneficial for new real estate buyers. However, the impact of losing indexation benefits will be felt by those holding historical properties, especially those acquired before 2001 or properties where appreciation hasn’t outpaced inflation. These owners might face slightly higher capital gains taxes. 

While housing demand remains strong, we might see a reduction in speculative investments in urban areas, with investors potentially exiting properties that don’t appreciate rapidly enough. This segment could potentially redirect their allocations to financial markets. Overall, we’re observing a growing trend among investors towards understanding and appreciating the unique advantages of equity investing.

When it comes to unlisted shares, the tax harmonisation strategy now aligns rates with those of listed shares. This creates an intriguing opportunity for HNIs to explore the unlisted equity market. Other investment options that have become more attractive include overseas funds, gold funds, REITs/INVITs, and equity fund of funds, all now taxed at 12.5 per cent for LTCG. Foreign equity/debt, unlisted equity, and physical gold, if held for 24 months, also fall under this tax bracket. This clarity in tax structure allows investors to choose instruments that best suit their risk appetite and holding horizon.

It’s also worth noting that the marginal increase in capital gains tax on listed equities is unlikely to dampen investor sentiment significantly. The domestic inflow story remains strong, underpinned by the robust growth prospects of the Indian economy and equity markets.

While the Budget 2024 tax reforms have indeed reshaped the investment terrain, they also present new opportunities for astute investors. HNIs should view this as a chance to optimise their portfolios, diversifying across both domestic and international markets, and exploring asset classes that now offer more favourable tax treatment. The key lies in making informed decisions based on an understanding of these changes, aligning investments with long-term financial goals, and maintaining a balanced approach to risk and return.

(The author is Partner and Co-Founder, Upwisery Private Wealth)