Mutual fund industry (and investors) has got one more bad budget. To be fair to the mutual fund industry, it wasn’t expecting much from the budget this year. Most senior fund management team refused to participate in stories dealing with the budget expectations. Amfi, a nodal association of mutual funds across India, put out a 17-point wish-list, and it remained just wishes – once again. Okay, now what is the way ahead for you?
One, do your math before choosing the new personal tax regime. All the calculations you might have come across assume that you are claiming all sorts of deductions and exemptions permitted under the IT Act. That need not be the case. Do a calculation based on your usual tax-saving strategy and find out which tax rate – the old and new – suits you the best.
If you are choosing the old rate and your tax-saving plans, great. Keep your SIPs in ELSS going.
If you are opting for the new tax regime for convenience, you should be careful about your savings and investments. If getting more bucks in your bank account is the sole reason for you to opt for the new personal tax regime, you are an ideal candidate to blow up the money. Most financial planners and mutual fund advisors fear that many youngsters are likely to opt for the new tax rates because it offers them a lot of freedom and more cash in hand. And they would end up with no savings and investments well into their 30s.
You should try to have a good savings/investment ratio from the next financial year. Try to save at least 30-40% of your salary. For short-term goals, stick to bank deposits and debt mutual funds. For long-term financial goals for five yeas and beyond, you may consider investing in equity mutual funds. Provided, you are ready to take the extra risk.
If you spend the extra money you might get in hand, you would repent it later. After 10 years, when you become conscious of saving and investing for retirement, you would surely find that it is difficult to make up for the lost time.
See for yourself: if you start investing Rs 5,000 every month when you are 25, you would be able to create a corpus of Rs 94.88 lakh when you are 50. What if you start investing when you are 35, you would have only Rs 25.44 lakh when you are 50 years old. Even if you invest Rs 10,000 every month, you would not be able to catch up. You would create only Rs 50.45 lakh in 15 years. We are assuming an annual return of 12%.
Sure, you don’t need to invest in an ELSS mutual fund since you can’t claim tax deductions under Section 80C of the Income Tax Act if you choose the new tax regime. You can choose a good multi cap mutual fund scheme to achieve your long-term financial goals.
To choose a scheme, look at our recommendation list: Best multi cap mutual funds to invest in 2020
Mutual fund investors also should remember that dividends from mutual funds would be added to your income and taxed according to the income tax slab applicable to you. Earlier mutual funds used to pay tax on dividends declared: 11.648% on equity mutual funds and 29.12% on debt mutual funds. Now, you would pay taxes on the dividends.
If you are on the 10% or 20% tax slab, you stand to gain on dividends from your debt mutual funds. If you are on the 30% income tax slab, you would pay more tax on dividends. Dividends are not attractive on equity schemes anymore for most people. So, opt for the growth option instead and choose SWP-route to withdraw money regularly. Note, capital gains tax would apply when you are withdrawing money through SWPs.
If you sell your debt mutual funds before three years, short-term capital gains would be added to your income and taxed according to the tax slab applicable to you. If you sell your debt mutual funds after three years, gains are treated as long-term capital gains and taxed at 20% with indexation benefit.
If you sell your equity mutual funds before a year, you need to pay short-term capital gains tax at 15%. If you sell your equity mutual funds after a year, the gains would be treated as long-term capital gains and taxed at 10%.
Do not let the disappointment regarding the LTCG tax influence your decision to invest in equity mutual funds. Simply remind yourself that you are investing in equity mutual funds because they have the potential to offer superior returns than other asset classes over a long period. Repeat yourself that equity is essential to make inflation-beating, better after-tax returns – which is essential to create a large corpus over a long period.