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On July 23, 2024, Union Finance Minister Nirmala Sitharaman took the stage to unveil the Union Budget for 2024-25. This budget, like every year, brought its fair share of excitement, especially in the realm of taxation. One of the most talked-about aspects? The changes to the capital gains tax framework. If you’re an investor or someone keen on understanding how these changes might affect you, you’re in the right place. Let’s break down the new rules, the historical context, and the reasons behind these significant shifts.
Overview of the 2024 Budget – Taxation Wise
The Union Budget 2024 has introduced some notable changes in the taxation landscape, with a sharp focus on capital gains taxes. Here’s a quick snapshot of the major taxation changes announced:
- Short term Capital Gains Tax (STCG): The tax rate on short-term capital gains for certain financial assets has been increased from 15% to 20%.
- Long term Capital Gains Tax (LTCG): The tax rate on long-term capital gains for all financial and non-financial assets is now standardized at 12.5%.
- Exemption Limit: The exemption limit for long-term capital gains has been raised from ₹1 lakh to ₹1.25 lakh.
- Indexation Benefits: Indexation benefits have been removed across all asset classes, impacting how inflation adjustments are made.
- Securities Transaction Tax (STT): The STT on options has increased from 0.0625% to 0.1% and on futures from 0.0125% to 0.02%.
Changes in Capital Gains Taxes – A Comparative Table
To give you a clearer picture of the differences introduced in the 2024 Budget, here’s a comparative table highlighting the changes in capital gains tax rates:
Capital Gains Tax Changes 2024
Historically, How Capital Gains Taxation Has Developed
The history of capital gains taxation in India is rich and varied, reflecting the country’s economic evolution and policy shifts. Here’s a quick tour through the major milestones:
Early Days and Post-Independence Era
The concept of capital gains tax was first introduced in India with the Income Tax Act of 1947. However, it wasn’t until the Union Budget of 1956-57 that capital gains tax became a permanent fixture. The then finance minister, T.T. Krishnamachari, set the stage by introducing a regime where capital gains up to ₹15,000 were exempt, while gains exceeding ₹10 lakh were taxed at 31.3%.
The 1990s: Liberalization and Indexation
The economic reforms of the 1990s, particularly under Finance Minister Manmohan Singh, brought significant changes. In 1992, indexation benefits were introduced, allowing the cost of acquisition and improvement of assets to be adjusted for inflation. This was a game-changer, especially for long-term investors, as it helped mitigate the impact of inflation on capital gains.
Early 2000s: Exemptions and Simplifications
Fast forward to 2004, Finance Minister P. Chidambaram made a revolutionary move by exempting long-term capital gains (LTCG) from securities transactions altogether. Instead, a small securities transaction tax (STT) was introduced. This period also saw the short-term capital gains (STCG) tax on listed equities set at 10%, later increased to 15% in 2008.
2018: The Return of LTCG Tax
In 2018, LTCG on equities made a comeback. Finance Minister Arun Jaitley reintroduced a 10% tax on long-term gains exceeding ₹1 lakh, a move aimed at generating additional revenue while maintaining a favorable environment for investors.
2020 Onwards: Modern Adjustments
Another notable change was Finance Minister Nirmala Sitharaman’s 2020 abolition of the dividend distribution tax (DDT), which shifted the tax burden directly to shareholders.
Behind the Changes in the 2024 Budget
So, what prompted these latest changes in the capital gains tax framework? Let’s dive into the motivations behind the 2024 Budget reforms:
Revenue Generation
One of the primary drivers behind increasing tax rates and removing indexation benefits is to boost government revenues. As the economy continues to grow, the need for funds to support various developmental projects and social schemes also rises.
Encouraging Long-term Investments
By increasing the tax rate on short-term gains, the government aims to nudge investors towards holding their investments for longer periods. This move is designed to stabilize markets and reduce speculative trading, promoting a healthier investment environment.
Simplification and Standardization
Standardizing the LTCG tax rate across different asset classes simplifies the tax system. This change makes it easier for investors to understand and comply with tax regulations, reducing the complexity often associated with varied tax rates and benefits.
Addressing Inflation Adjustments
The removal of indexation benefits, although a hit to long-term investors, reflects an effort to streamline the tax framework. By eliminating these adjustments, the government aims to create a more straightforward taxation system, albeit at the cost of higher taxes on real gains.
Read more – Capital Gain Bonds Interest Rate: Should You Invest In Capital Gain Bonds In 2024?
Equitable Taxation – Moving Towards Fairness
Equitable taxation is about creating a tax system where the burden is fairly distributed across different segments of society. The 2024 Budget takes several steps in this direction:
Increased Exemption Limits
Raising the exemption limit for LTCG from ₹1 lakh to ₹1.25 lakh helps small investors by providing a higher threshold before taxes kick in. This move is particularly beneficial for retail investors who are investing smaller amounts.
Standardized Tax Rates
By applying a uniform LTCG tax rate of 12.5% across all asset classes, the government aims to eliminate the discrepancies that existed between different types of investments. This standardization is a step towards a fairer and more transparent tax system.
Simplified Compliance
A simplified tax system with fewer exceptions and special rules makes compliance easier for taxpayers. This, in turn, helps in reducing tax evasion and improving overall tax collection.
Real-World Impacts and Investor Sentiment
Stocks and Equity Mutual Funds
For stocks and equity mutual funds, the short-term capital gains tax rate has increased from 15% to 20%, while the long-term capital gains tax rate has been increased from 10% to 12.5%. The exemption limit has also been raised from ₹1 lakh to ₹1.25 lakh. According to Niranjan Avasthi, Head of Product and Marketing at Edelweiss Asset Management, “The move will nudge more long-term investing in equities as the taxation on short-term capital gains has been increased.”
Other Mutual Funds
The mutual fund industry has welcomed the clarity in the budget for fund-of-funds and gold/silver exchange-traded funds (ETFs). Changes in the previous budget had led to fund-of-funds and gold/silver ETFs being treated as debt funds for taxation purposes. Under the new rules, equity fund of funds will be taxed at the slab rate of the investor if held for less than 24 months, and the long-term capital gains tax rate of 12.5% will be applicable. Swarup Mohanty, CEO of Mirae Asset MF, said, “There was an anomaly for fund-of-funds after the previous budget and this clarity is a welcome step.”
Real Estate
The removal of the indexation benefit is likely to impact real estate investors the most. Indexation had allowed investors to adjust their acquisition price as per inflation, helping them lower their capital gains for taxation purposes. Prakash Hegde, a Bengaluru-based chartered accountant, commented, “This proposal is going to discourage long-term investment in properties and encourage short-term investment. The saddest part is that people who were already holding it till now will lose the indexation benefit.”
Debt Mutual Funds
Debt mutual funds will continue to be taxed at the slab rate of the investor. The mutual fund industry had hoped for a reversal of last year’s budget changes on debt funds that had removed indexation benefits. However, gains from debt funds will continue to be taxed at the slab rate of the investor, regardless of their holding period.
Other Investments
Unlisted investments such as physical gold will now get the benefit of the long-term holding period after 2 years of holding. This was 3 years under previous rules. The new rules will also give investors the benefit of the long-term capital gains tax rate of 12.5%, which has been standardized across asset classes.
Conclusion: Navigating the New Capital Gains Tax Landscape
With the recent changes in capital gains tax rates from Budget 2024, investors need to adjust their strategies. The increase in LTCG to 12.5% will affect long-term investors, though the raised exemption limit of Rs 1.25 lakh offers some relief. Short-term investors should be aware of the STCG rise to 20%, which underscores the value of long-term investment strategies.
Experts recommend focusing on debt markets more than equities. According to Fisdom Research, adopting a barbell strategy—investing in both short-term and long-term bonds—can help manage interest rate risks and capitalize on potential rate declines. With a positive outlook on reduced fiscal deficits and increased foreign investments supporting bond prices, increasing exposure to debt instruments could be particularly beneficial.
Visit Aspero to explore bonds.
For equities, Feroze Azeez from Anand Rathi Wealth suggests maintaining a diversified 60:20:20 allocation in large, mid, and small-cap stocks. This approach, combined with a buy-on-dip strategy, can help navigate market fluctuations.
In summary, adapting to the new tax landscape involves reassessing your investment mix, focusing on debt for stability and growth, while maintaining a strategic approach to equities and other assets.
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