Union Budget 2020 India: Asset allocation calls for understanding the risk-return metric of the investor based on factors such as liquidity, time horizon, taxation, and legal requirements.
- Rajesh Cheruvu
Budget 2020-21: Currently, investors have to deal with lots of complexities to determine the taxability of their gains. So much so, that investment decisions/advice end up simply being driven by post-tax returns and not the pure qualities of the specific instrument/asset. Asset allocation calls for understanding the risk-return metric of the investor based on factors such as liquidity, time horizon, taxation, and legal requirements. More often than not, a lot of emphasis is placed on tax implications at the expense of ensuring an asset allocation true to the investors’ risk appetite and return requirement.
At the present juncture, various asset classes have differing capital gains tax rates based on the period of holding the asset, the type of investor and the level of income.
- Asset classes: Listed equity shares, Unlisted equity shares, Equity oriented MF, Other MF, Zero-coupon bonds, Other Bonds & Debentures, Immovable property (like Real Estate in form of Land, House, etc.), Movable property (like Gold bars, Jewelry, etc.)
- Holding Period classification: Short-term and Long-term which varies between 12/24/36 months
- Type of investor: Individual/HUF/Trust, Partnership firm, domestic corporate, foreign corporate
- Level of Income: Surcharge is applicable beyond specified levels of income
Small investors who do not understand the tax implications of their investments are not able to participate in the capital/financial markets and hence do not benefit from the nation’s economic growth. The government has shown keen interest in rationalizing the capital gains tax structure as it will ease tax compliance for individuals and lead to broad basing of investors. In 2017, indirect taxes were rationalized by introducing the Goods & Services Tax, which absolved several existing taxes and duties at the center and state level. This too led to the smooth movement of goods across state borders and formalization of supply chains which over the long-term will stop tax leakages and lead to better tax compliance and collections.
Watch Video: What is Union Budget of India?
Uniformity in taxation structure across the different asset classes – Equity, Fixed Income, MF, Real Estate – has also been recommended by the task force working on the Direct Tax Code which is new reform legislation aimed at replacing the existing Income Tax Act. Broad asset categories can look like financial – Equity, Financial – Non-Equity and Non-Financial.
Moving away from domestic taxation, on the global wealth front, the Budget could some promise as well. As we are progressing towards a more information efficient world, high net worth individuals in India are realizing the importance of investing in a more diversified portfolio, not just across asset classes but geographically too. Technological advances are making global markets more accessible while keeping them cost-efficient.
One of the biggest hindrances for the growth of such investments from India is the lack of clarity with respect to the treatment of income and gains from portfolio investments made offshore. Since there is an ambiguity, it leads to different and at times conflicting interpretations of these regulations. As an informed investor, one may be keen to invest in global markets, with avenues readily available but the thought of having to deal with complexities surrounding both the tax payable and even more so reporting can be a real showstopper.
Such an investment avenue will only enable Indian HNIs to invest, grow and protect their wealth by diversifying their portfolios. Clearer guidelines for the tax treatment of offshore portfolio investments will go a long way in increasing transparency and efficiency in tax reporting. One may gradually hope for uniformity in taxation structure, at par with domestic portfolio investments, over a period of time, which should make the entire tax reporting seamless.
Rajesh Cheruvu is Chief Investment Officer, Validus Wealth. Views expressed are the author’s personal.