Capital Gains Tax Changes in Union Budget 2024, New Changes

Overview

In the recent Union Budget 2024, significant changes were introduced to simplify and standardize capital gains tax on various asset classes in India. Here’s a comprehensive overview, covering key updates along with a closer look at how the changes impact both long-term and short-term capital gains for different asset types.

What Are Capital Gains and How Are They Taxed?

Capital gains refer to the profit made from the sale of capital assets, such as stocks, real estate, gold, bonds, and mutual funds. The tax treatment of these gains depends on the holding period of the asset and its nature. Capital gains are divided into short-term capital gains (STCG) and long-term capital gains (LTCG), each having specific tax rates and criteria based on the asset type and duration of holding.

Defining Short-Term and Long-Term Capital Gains

Short-Term Capital Gains (STCG)

Short-Term Capital Gains (STCG) are the profits you make from selling assets like stocks, bonds, mutual funds, or property after holding them for a short time. The length of time you need to hold an asset to classify it as short-term depends on the type of asset:

• Stocks and Equity Mutual Funds: Sold within 1 year of buying.
• Debt Mutual Funds: Sold within 3 years of buying.
• Real Estate: Sold within 2 years of buying.
• STCG are generally taxed at higher rates compared to LTCG to discourage frequent buying and selling of assets, which can increase market volatility.

Long-Term Capital Gains (LTCG)

Long-Term Capital Gains (LTCG) are profits earned from selling assets like stocks, bonds, mutual funds, or real estate after holding them for a longer period. The required holding period for an asset to qualify as long-term depends on the asset type:

• Stocks and Equity Mutual Funds: Held for more than 1 year.
• Debt Mutual Funds: Held for more than 3 years.
• Real Estate: Held for more than 2 years.
• Gains from assets held for a more extended period, typically over 12 or 24 months, depending on the asset type.
• LTCG have traditionally received favorable tax treatment to encourage long-term investments, such as lower tax rates and, in some cases, indexation benefits, which adjust for inflation.

Changes to Capital Gains Tax in the 2024 Budget

The Finance (No. 2) Bill, 2024 seeks to bring simplicity and uniformity to capital gains taxation. With streamlined tax rates and holding periods, the Budget reduces complexity for investors and aligns with global practices.

Key Highlights

• Unified Tax Rates:
  LTCG is now uniformly taxed at 12.5% across all asset classes, replacing the previous differentiated tax rates.
  The tax on STCG from listed equity shares and equity-oriented mutual funds has increased from 15% to 20%.

• Standardized Holding Periods:
  A 12-month holding period now applies to listed assets, such as equity shares, equity-oriented mutual funds, real estate investment trusts (REITs), and infrastructure investment trusts (InvITs).
  For unlisted assets like real estate, debt funds, and gold, the holding period required for LTCG classification is now 24 months.

• Removal of Indexation for Most Assets:
  Indexation benefits, which previously allowed for inflation-adjusted gains calculation, have been removed for most assets.
  This benefit will now only apply to land and buildings acquired before July 23, 2024.

• Revised Exemption Limits:
  The annual LTCG exemption limit for listed equities and equity-oriented mutual funds has increased from INR 1 lakh to INR 1.25 lakh.

Detailed Breakdown of Changes Across Asset Classes

Listed Equity Shares and Mutual Funds

• LTCG: Gains held for over 12 months are now taxed at 12.5%, with a higher exemption threshold of INR 1.25 lakh.
• STCG: Taxed at 20%, up from 15%, regardless of the investor's income tax slab.

Debt Mutual Funds

• Previously subject to LTCG tax with indexation after a 36-month holding period.
• Now, the holding period for LTCG classification is reduced to 24 months, and all gains are taxed at 12.5% without indexation.

Real Estate

• LTCG tax for properties held over 24 months is now a flat 12.5% without indexation.
• For properties acquired before July 23, 2024, owners can opt for a 20% tax rate with indexation or 12.5% without indexation.

Gold and Gold-Related Assets

• Physical gold, gold ETFs, and sovereign gold bonds now require a holding period of 24 months for LTCG.
• LTCG on these assets is taxed at 12.5% without indexation.

Unlisted Shares and Foreign Shares

• Holding period for LTCG classification is now 24 months.
• All gains are taxed at 12.5% without the benefit of indexation, aligning with other unlisted assets.

Market-Linked Debentures and Certain Debt Instruments

• Gains from unlisted bonds or debentures sold after July 23, 2024, are treated as STCG and taxed per the investor's income tax slab.

Implications for Investors

Encouragement of Long-Term Investment

The standard 12-month and 24-month holding periods and consistent tax rates are likely to promote long-term investment strategies, discouraging the frequent trading of assets. This shift is expected to benefit investors by aligning the tax policy with the risk profiles of different asset classes, encouraging more stable, long-term financial planning.

Simplification of Tax Calculations

With a uniform tax rate and streamlined holding periods, calculating taxes on capital gains becomes more straightforward. Investors no longer need to worry about varying holding periods for each asset type or applying different tax rates based on asset class. This simplification is a significant relief for individual investors who manage diversified portfolios.

Impact on High-Net-Worth Individuals (HNIs)

The revised LTCG rate of 12.5% and the increased STCG rate on equities will impact HNIs, who are more likely to have substantial holdings in listed equities and real estate. While they benefit from a simpler tax structure, the increased STCG on equities could influence trading behaviors among high-frequency traders or wealth managers who invest heavily in equity markets.

Consideration of Asset Allocation Strategies

For individual investors, these changes highlight the importance of carefully planned asset allocation. With indexation no longer available for most assets, investors may favor listed equities and REITs for their tax advantages on LTCG. Similarly, tax-savvy investors might reconsider debt funds and real estate, adjusting holding periods to optimize post-tax returns under the new framework.

Buybacks Taxed as Dividends

From October 1, 2024, buyback proceeds will be treated as dividend income, taxable at the investor's applicable slab rate. This change particularly affects companies in sectors where buybacks are common, as well as individual investors who previously received tax-free buyback returns. Non-resident investors will need to assess their tax treaties to determine if they can claim relief under a Double Taxation Avoidance Agreement (DTAA).

Transitioning to the New Regime: Effective Dates and Exemptions

The changes in tax rates, holding periods, and exemptions took effect from July 23, 2024, for most asset classes. However, certain exceptions apply to gold and international funds, which will adopt the new rules starting April 1, 2025. Investors who purchased real estate or land before July 23, 2024, may still benefit from indexation if they choose the 20% tax rate with indexation over the 12.5% rate without it.

Summary of Key Changes for Capital Gains After Budget 2024

Asset Class	Holding Period for LTCG	LTCG Tax Rate	STCG Tax Rate	Indexation Availability
Listed Equity Shares and Equity Mutual Funds	>12 months	12.5%	20%	None
Debt Mutual Funds	>24 months	12.5%	Per Slab	None
Real Estate (Property)	>24 months	12.5% (or 20% with indexation for pre-July 2024 assets)	Per Slab	Limited
Physical Gold, Gold ETFs	>24 months	12.5%	Per Slab	None
Unlisted Shares, Foreign Shares	>24 months	12.5%	Per Slab	None
Market-Linked Debentures, Unlisted Bonds	>24 months	Per Slab	Per Slab	None
Buybacks	N/A	N/A	Per Slab (as Dividend)	N/A

Final Thoughts

The capital gains reforms introduced in the 2024 Budget reflect the government’s commitment to a simpler, more uniform tax system. These changes remove many of the complications investors previously faced, making capital gains tax more predictable. While the removal of indexation and the increase in the STCG rate for equities may impact some investors, the uniform 12.5% LTCG rate offers a competitive, straightforward alternative to the previous complex structure.

By aligning holding periods and tax rates across asset types, the Finance (No. 2) Bill, 2024 is set to foster a tax-friendly environment that incentivizes stable, long-term investments, benefiting a broader range of individual and institutional investors. As the changes