How to invest after Budget 2004

This means that government assured or risk-free investments are yet going to yield fairly high returns, if inflation continues within the 4.5 to 5.5 per cent band.

If you invest in stocks, then there’s good news. Long-term capital gains (if you hold the stock for more than one year) on listed securities — those shares that are listed on a stock market — are now tax-free. This also means that you can no longer set off a long-term capital loss against a future gain.

Short-term gains (if you hold the stock for less than a year) are now to be taxed at 10 per cent, down from the earlier rate that clubbed the gain with income, so that investors in the 30 per cent tax bracket would have earlier paid Rs 30 for every Rs 100 of short-term profit.

But your transaction cost goes up due to the turnover tax of 0.15 per cent on the buyer. This means that if you buy (not sell) shares worth Rs 1 lakh, you pay Rs 150 as a turnover tax. To this, add brokerage costs, ranging between 0.6 per cent to 1.5 per cent at the retail level.

If you are a mutual fund investor, it is status quo for you. Equity funds continue to pay no tax on their income disbursals and debt funds are charged 12.5 per cent. But since mutual funds are not ‘listed securities’ they do not get the long-term capital gain tax free status and pay 10 per cent non-indexed or 20 per cent indexed tax on gains. A good strategy is to use the ‘divided reinvestment’ option to get growth without the tax. If you were using the loophole in the gift tax laws to transfer income, that is no longer available. Any ‘gift’ of more than Rs 25,000 given by a non-family member will be taxed at your marginal rate.

If you are a senior citizen, you can rejoice today. As before, legally earn Rs 2.7 lakh of gross income and yet remain in the tax free zone. Your options are now increased, with a new instrument that gives a return of 9 per cent being introduced to cushion you against the interest inflation scissor. Your family can use your age to earn a higher return and augment the family income. The real tax and rate rationalisation will come next year. Until then, enjoy!