In this way the stick of old age will be weakened! Tax on retirement income increased by 40%.

New Delhi. The general rule of income tax is that it always applies to future projects. It should not be applied if you have made any investments before, but in the Budget 2024 presented on July 23, the government ended de-indexation, i.e. exemptions on all types of capital gains related to inflation. After the budget, the opposition also made a fuss about it, but most of the talk revolved around property. But, did you know that this new rule will also weaken your old age stick? Why and how, let us explain to you in very simple language and calculations.

According to Live Minutes, first we remind you what changes the government has made on capital gains. Let’s go back a year for that. In the year 2023, the government has done away with the benefit of indexation in the most preferred mutual fund category for retirement. We are talking about debt mutual funds, on which you hardly get returns of 7 to 8 or at most 9 percent. This means that you will get barely 10% annual return on this fund. Nevertheless, relying on the power of compounding, this fund has the potential to generate good returns over the long term. This is the reason why most people prefer debt mutual funds to build their retirement fund.

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What was the change?
Debt mutual funds were to be prioritized 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 are directly affected. Earlier, this category of mutual funds was taxed at 20% on long-term returns, although there was an exemption on returns relative to inflation. Due to which the effective tax was 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, it was fine until now, we’re not going to put any money into it. But the real problem starts now.

What happened in 2024?
In the last one year, people have made up their minds that let’s not invest money here. But, in Budget 2024, the government scrapped indexation on all types of capital gains investment and reduced long-term capital gains tax from 20 percent to 12.5 percent. It will also affect money invested in the 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.

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

But, after indexation ends in Budget 2024, you will have to pay 12.5% ​​tax on the entire capital gain. That is 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 directly increased by 40%. This math is only after 3 years of investment, just imagine what would happen if you build a retirement fund for 30 years. The old man’s stick became weak!

Tags: budget meeting, Business news, Income tax, mutual fund