Budget 2024 Reforms: Reshaping HNI Investment Decisions in India

The Union Budget 2024, presented on July 23, 2024, introduced significant reforms to capital gains taxation, reshaping the investment landscape for High-Net-Worth Individuals (HNIs) in India. With over 1.74 lakh DPIIT-recognized startups and a projected economic growth rate of 6.5–7%, these changes aim to simplify tax structures, promote equitable capital allocation, and align with India’s Viksit Bharat vision by 2047. This article explores how these reforms—covering capital gains taxation, private equity, venture capital, pre-IPO investments, angel networks, unlisted companies, overseas investments, real estate, equities, and mutual funds—affect HNI strategies, drawing on insights from Anuragg Jhanwar and industry data.

Key Budget 2024 Tax Reforms

The Budget 2024 reforms streamline capital gains taxation, impacting HNI portfolios across asset classes:

1. Uniform Capital Gains Taxation:
   • Listed Securities (e.g., equities, equity ETFs, REITs, InVITs):
     • Short-Term Capital Gains (STCG, <12 months): Increased from 15% to 20%.
     • Long-Term Capital Gains (LTCG, >12 months): Increased from 10% to 12.5%, with an exemption limit raised from ₹1 lakh to ₹1.25 lakh per year.
   • Unlisted Securities (e.g., unlisted shares, bonds, property):
     • STCG (<24 months): Taxed at slab rates.
     • LTCG (>24 months): Uniform 12.5% without indexation (previously 20% with indexation for some assets).
   • Debt Mutual Funds:
     • Post-April 2023 investments: Taxed at slab rates as STCG, regardless of holding period.
     • Pre-April 2023 investments: LTCG at 12.5% after 24 months.
   • Gold/International ETFs and Funds:
     • ETFs: LTCG at 12.5% after 12 months; STCG at slab rates.
     • Funds/FoFs: LTCG at 12.5% after 24 months; STCG at slab rates.
   • Impact: Simplifies compliance but increases tax liability for assets previously benefiting from indexation (e.g., real estate).
2. Buyback Taxation:
   • Effective October 1, 2024, buyback proceeds are treated as dividends, taxed at slab rates (up to 30% for HNIs), with acquisition costs claimable as capital losses. Previously, companies paid 23.296% tax, exempting shareholders. This shifts the tax burden to HNIs, impacting cash flow.
3. Abolition of Angel Tax:
   • Section 56(2)(viib) removed, eliminating tax on share premiums for startups, boosting investor confidence in unlisted companies.
4. Securities Transaction Tax (STT):
   • Futures: Increased from 0.0125% to 0.02%.
   • Options: Increased from 0.0625% to 0.1%. This discourages speculative trading, nudging HNIs toward long-term investments.
5. Overseas Investments:
   • Removal of tax advantages for ETFs held abroad via the Liberalised Remittance Scheme (LRS) levels the playing field for domestic funds. Double Taxation Avoidance Agreements (DTAAs) with over 80 countries (e.g., US, UK) reduce tax liabilities for overseas investments.

Impact on HNI Investment Decisions

1. Shift to Financial Assets from Real Estate

• Real Estate: Removal of indexation benefits for properties acquired post-2001, coupled with a 12.5% LTCG rate, reduces tax efficiency. For example, a property bought for ₹50 lakh in 2010 and sold for ₹2 crore in 2024 would incur ₹18.75 lakh in LTCG tax (12.5% on ₹1.5 crore gain) versus ₹12.8 lakh with indexation (20% on adjusted gain).
• Implication: HNIs may redirect ₹5–10 lakh crore from real estate to equities, mutual funds, and alternative investments due to higher liquidity and comparable tax treatment.
• Action: Evaluate property holdings; consider exiting low-appreciation assets within 12 months and reinvesting in equities or ELSS for Section 80C benefits (up to ₹1.5 lakh deduction).

2. Increased Appeal of Private Equity and Venture Capital

• Tax Harmonization: Uniform 12.5% LTCG for unlisted securities aligns taxation with listed equities, making private equity (PE), venture capital (VC), and pre-IPO investments more attractive. PE investments rose 31% year-on-year in Q1 2024, with $6.2 billion across 299 deals.
• Angel Tax Removal: Eliminates tax on startup share premiums, encouraging angel network investments. In 2024, angel investments reached $1.5 billion across 1,200 startups.
• Example: Gaja Capital’s investments in RBL Bank yielded 5x returns, showcasing PE potential.
• Action: Allocate 10–20% of portfolio to PE/VC funds or angel networks, targeting DPIIT-recognized startups for tax exemptions and IP rebates within 60 days of investment.

3. Overseas Investments via DTAAs

• Opportunity: DTAAs with 80+ countries reduce tax liabilities (e.g., 5–15% on dividends for UK-based investors). Removal of LRS ETF advantages makes domestic funds competitive.
• Example: A ₹1 crore investment in a US equity fund via LRS now faces similar tax treatment as domestic funds, simplifying compliance.
• Action: Diversify 15–25% of portfolio into international equities or ETFs in DTAA countries, using domestic fund managers for compliance within 90 days.

4. Equities and Mutual Funds Remain Attractive

• Tax Changes: Higher STCG (20%) and LTCG (12.5%) rates, with a ₹1.25 lakh exemption, encourage long-term equity investments. Mutual fund cash reserves grew to ₹1.8 lakh crore in 2024, reflecting strong domestic inflows.
• ELSS Benefits: Equity-Linked Savings Schemes offer ₹1.5 lakh deductions under Section 80C, unchanged in Budget 2024.
• Action: Hold equity mutual funds for >12 months to leverage LTCG exemptions; allocate ₹1.5 lakh annually to ELSS for tax savings within 6 months.

5. Challenges and Strategic Adjustments

• Challenges:
  • Higher Taxes: Increased STCG (20%) and buyback taxes (up to 30%) reduce post-tax returns, impacting short-term traders.
  • Real Estate: Loss of indexation increases tax liability for long-held properties, deterring speculative investments.
  • Compliance Complexity: Separate reporting for pre- and post-July 23, 2024, transactions adds administrative burden.
• Solutions:
  • Shift to long-term holdings to benefit from lower LTCG rates and ₹1.25 lakh exemption.
  • Use capital losses from buybacks to offset gains, carrying forward losses for up to 8 years.
  • Consult tax advisors to optimize ITR filings under ITR-2 or ITR-7 within 90 days of fiscal year-end.

Conclusion

Budget 2024’s tax reforms, including uniform LTCG rates, angel tax abolition, and LRS adjustments, create a level playing field for HNIs, encouraging diversification into PE, VC, unlisted companies, and overseas investments. While real estate’s tax efficiency declines, equities and mutual funds remain attractive with a ₹1.25 lakh LTCG exemption. HNIs should reallocate 10–20% of portfolios to PE/VC and 15–25% to international assets within 90 days, leverage DTAAs, and hold equities for >12 months to optimize returns. Consulting tax advisors and registering with DPIIT for startup investments can further enhance outcomes. As Anuragg Jhanwar notes, thriving HNIs will view these reforms as a catalyst for strategic portfolio optimization.

Disclaimer: This article is for educational purposes and does not constitute financial or legal advice. Consult certified advisors and verify details with DPIIT or tax authorities.