Your Money: Union Budget Is Not A Portfolio Shuffling Game

Watch out for any tax changes that may affect your net returns.

There are certain things that are portrayed as, and perceived as, different from what it stands for. The Union Budget is one of them. To state basic facts, the speech to be delivered by the Finance Minister on February 1, 2023 will delineate the outline. The Finance Act to be presented in Parliament will have the details.

Of what? In the next financial year, where the government expects to get its money; i.e., taxes, etc., and where it will spend the money. Most of the expenditures are in a way pre-decided, without much scope for the government to take a decision. Interest payments, for example, on outstanding government bonds — the biggest component of expenditure — it is not for the government to “decide”.
The majority of the inflows like GST, income tax, corporate tax, etc., and most of the expenses like interest payouts, salaries of government employees, etc., are already a given. At the margin, where to tweak, where to spend little more, how much should be the deficit, where to get a little more money from, etc., are decided through the Union Budget. Is it important? Yes, from the national perspective, from the economy perspective. The decisions taken or communicated through the Union Budget impacts our economy at the margin. Certain changes in policies are executed through the Budget.

Investment portfolio

We started off by saying the Budget is not a portfolio shuffling game. Your investment portfolio has been constructed over a period of time, keeping in mind certain objectives, requirements, time-frame, etc. Any change in your portfolio should be affected only when there is a significant change either in your background or objectives or in the fundamentals of the market / product you have invested in. The presentation of the Budget is an important event, but for that matter, events relevant for the market happen every other day. It is relevant for you to be aware of, as it would have some impact at the margin, on your investment portfolio.

Watch out for any changes in tax rules

Having said that, you have to watch out for one aspect of the Union Budget. That is, any changes in taxation rules. Within the portfolio allocation you have, you would like to optimise on net-of-tax returns, as that is what you take home. There are widespread discussions in various circles that capital gains taxation rules may be tweaked in the forthcoming Union Budget. What will happen, or not happen, only time will tell. The other aspect is, the applicable date of any change in tax laws.

This is technically called the grandfathering clause, where new investments are subjected to new rules and old ones are left alone. We can only discuss possibilities at this stage. As an example, for equity stocks and equity mutual funds, the holding period required is one year for long term capital gains taxation, which is a lower tax rate than short term capital gains. If that is increased to, say, two years, ideally it should not make a difference if you are an investor and not a trader.

For bond mutual funds, the holding period required is three years for long term capital gains taxation. If that is reduced, and if there is grandfathering clause, then your fresh investments would be subjected to the new rules. For direct bond investments, there is no indexation benefit available currently. If that is allowed, it would be good for investors. The point of discussion in various circles is that the holding period required for long term capital gains tax is different for the asset classes. It is one year for equity, two years for real estate, and three years for debt mutual funds. There should be uniformity, or semblance of uniformity, in this.

Net-net, on February 1, 2023, you may have your eyes on the TV set or other media to keep track of what’s happening, like looking out of the window of the train. As mentioned earlier, every data point or event need not be acted upon. If there is any change in taxation rules, which you may like to act upon, will evolve post the event.


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