The finance minister Nirmala Sitharaman has proposed following changes in the capital gains taxation regime in Budget 2024:
1. Short term gains on listed equity shall attract a tax rate of 20% from 15% currently, while that on all other financial assets and all non-financial assets shall continue to attract the applicable tax rate.
2. Long term gains on all financial and non-financial assets, on the other hand, will attract a tax rate of 12.5%. The proposed rate hikes the tax rate by 2.5% for listed equity from 10% currently but reduces the tax rate by 7.5% for other assets such as house property, unlisted equity shares etc. The indexation benefit has also been removed on all the assets having long-term capital gains.
3. There is a proposal to increase the limit of exemption of capital gains on listed equity and equity oriented mutual funds to Rs 1.25 lakh per year from Rs 1 lakh currently.
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4. Listed financial assets held for more than a year will be classified as long term, while unlisted financial assets and all non-financial assets will have to be held for at least two years to be classified as long-term.
5. Unlisted bonds and debentures, debt mutual funds and market linked debentures, irrespective of holding period, however, will attract tax on capital gains at applicable rates.
Shalini Jain, Tax Partner, People Advisory Services, EY India says, "The 2024 Budget introduces key changes to capital gains tax, effective July 23, 2024. Assets will be classified as long-term based on holding periods: over 12 months for listed financial assets and over 24 months for unlisted financial and non-financial assets. Short-term capital gains tax on equity shares and equity funds rises to 20%, while other short-term gains remain at applicable tax rates. Long-term gains tax changed to 12.5% from the current rate of 10% or 20%, as applicable. Listed equity shares, funds, and business trusts gains over Rs 1.25 lakh are taxable, promoting longer investment periods."
What are the current tax rules for LTCG, STCG?
As per income tax rules, when an individual sells a capital asset, he/she can earn capital gains or losses. These capital gains or losses are categorised as short term or long-term depending on the nature of the capital asset and the period of holding specified for the asset for the purpose of this categorisation.
For instance, if the equity shares listed on a stock exchange are sold before 12 months are completed from date of purchase, then capital gains or loss will be categorised as short-term. If the listed equity shares are sold after completion of 12 months, then capital gains or loss will be categorised as long term. On the other hand, for unlisted equity shares, if sold before 24 months, the gains or loss will be called short term. If the unlisted equity shares are sold after 24 months, then gains or loss will be called long term.
Long-term capital gains, long term capital losses, short-term capital gains, and short term capital losses are abbreviated as LTCG, LTCL, STCG and STCL respectively.
Current holding period rules for capital gains to classify LTCG or STCG
According to Memorandum of the Finance Bill 2024 explaining the Budget proposals, "The taxation of capital gains is proposed to be rationalized and simplified. There are three components to this simplification. Firstly, it is proposed that there will only be two holding periods, 12 months and 24 months, for determining whether the capital gains is short-term capital gains or long term capital gains. For all listed securities, the holding period is proposed to be 12 months and for all other assets, it shall be 24 months. Accordingly, amendment is proposed in clause (42A) of section 2 of the Act. Thus units of listed business trust will now be at par with listed equity shares at 12 months instead of earlier 36 months. The holding period for bonds, debentures, gold will reduce from 36 months to 24 months. For unlisted shares and immovable property it shall remain at 24 months."
The memorandum further adds, "Secondly, the rate for short-term capital gain under provisions of section 111A of the Act on STT paid equity shares, units of equity oriented mutual fund and unit of a business trust is proposed to be increased to 20% from the present rate of 15% as the present rate is too low and the benefit from such low rate is flowing largely to high net worth individuals. Other short-term capital gains shall continue to be taxed at applicable rate."
Memorandum further adds, "The rate of long-term capital gains under provisions of various sections of the Act is proposed to be 12.5% in respect of all category of assets. This rate earlier was 10% for STT paid listed equity shares, units of equity-oriented fund and business trust under section 112A and for other assets it was 20% with indexation under section 112. However, an exemption of gains upto 1.25 lakh (aggregate) is proposed for long-term capital gains under section 112A on STT paid equity shares, units of equity oriented fund and business trust, thus, increasing the previously available exemption which was upto 1 lakh of income from long term capital gains on such assets. For bonds and debentures, rate for taxation of long-term capital gains was 20% without indexation. For listed bonds and debentures, the rate shall be reduced to 12.5%. Unlisted debentures and unlisted bonds are of the nature of debt instruments and therefore any capital gains on them should be taxed at applicable rate, whether short-term or long-term. It is proposed accordingly."
"Simultaneously with rationalisation of rate to 12.5%, indexation available under second proviso to section 48 is proposed to be removed for calculation of any long-term capital gains which is presently available for property, gold and other unlisted assets. This will ease computation of capital gains for the taxpayer and the tax administration," says the memorandum.
