How the last Union Budget helped shape investment opportunities for HNIs

When making any investment decisions, it is important to consider the tax implications, but the core focus should be on the merits of each asset class

• Long-term capital gains tax set at 12.5% for all asset classes
• Tax parity promotes broader portfolio diversification and startup investment.
• Investment decisions should focus on asset merits, not just tax efficiency

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In recent budgets, the government has focussed on simplification and rationalisation of taxes, sending the message that all asset classes should be evaluated on merit and investor profile rather than their tax implications.

Earlier, people would invest in insurance products mainly to save tax without considering their risk and return profiles. But lately, the government has tried to create consistency in taxation across asset classes.

One of the biggest changes is in the long-term capital gains tax (LTCG) on both financial and non-financial assets, uniformly set at 12.5 percent. This rate applies to all asset classes, including international feeder funds, equity fund of funds (FoFs), gold mutual funds, real estate, and even the unlisted space.

As financial advisers, our focus should be on asset allocation that seeks the best returns rather than prioritising tax efficiency.

You can factor taxation into an investment strategy, but it should not be the primary reason for making investment decisions. The most significant impact of this change in taxation is likely to be an increase in investments in international markets and in the unlisted space. HNIs and UHNIs are already diversifying outside India and into private markets, and these measures will allow for broader portfolio diversification.

For the unlisted space, these measures will encourage investors to allocate resources to innovative start-ups and promote entrepreneurship, leading to more inclusive and sustainable economic growth, which, in turn, means broader job creation and long-term growth.

Let me give you an example of how, while setting up a family office, one can offset capital gains income against family office expenses such as manager fees, wealth manager fees and auditor's fees. Additionally, considering cross-border investments and the platforms that minimise withholding tax will simplify administrative processes. This is beneficial because taxes can be paid according to the jurisdiction of residency, which allows us to plan strategically according to various tax laws. While tax considerations are very important, they are secondary factors that should not overshadow the core factors essential to establishing a family office.

When making any investment decisions, it is important to consider the tax implications, but the core focus should be on the merits of each asset class. The portfolio allocation should align with the risk profile and the time horizon of the investors. The parity in taxation across asset classes also means there is no tax preference for one asset class over another, creating a more balanced and rational approach to investing.