Budget 2024: All the key changes to capital gains tax explained

The Union Budget 2024 introduced significant modifications to the taxation of capital gains in India. One of the most notable changes is the harmonization of tax rates for capital gains. The government has proposed a uniform long-term capital gains (LTCG) tax rate of 12.5% across all asset classes, eliminating the previous tiered structure. However, this simplification comes at a cost. The benefit of indexation, which allowed taxpayers to adjust the purchase price of an asset for inflation, has been removed.

Additionally, the holding period for determining whether a capital gain is short-term or long-term has been revised. Listed securities will now be considered long-term after 12 months, while other assets require a holding period of 24 months.

The tax rate for short-term capital gains on equity-related investments has been increased from 15% to 20%. While the tax-free limit for long-term capital gains on equity-related investments has been raised from Rs. 1 lakh to Rs. 1.25 lakh, the removal of indexation is likely to offset this benefit for many taxpayers.

Furthermore, the budget has clarified the taxation of mutual funds, bringing them in line with the tax treatment of debt instruments. Mutual funds investing more than 65% of their assets in debt and money market instruments will now be treated as debt funds and taxed accordingly.

Key changes are as follows, as per Fisdom

Simplified Holding Periods: The government has simplified the holding period for determining whether capital gains are short-term or long-term. It's now a straightforward 12 months for listed securities and 24 months for all other assets.

Shares listed on stock exchanges, including units of listed business trusts, will be considered long-term after holding for 12 months.

All other assets, including unlisted shares, immovable property, bonds, debentures, and gold, will be considered long-term after holding for 24 months. Note that the holding period for bonds, debentures, and gold has been reduced from 36 to 24 months.

Increased Tax Rate: The tax rate for short-term capital gains on equity-related investments (like stocks, equity mutual funds, and business trust units) has been increased from 15% to 20%. This applies if you hold these assets for less than 12 months.  Short-term capital gains on assets other than equity-related investments will continue to be taxed at the applicable income tax slab rate.

Long-Term Capital Gains (LTCG)

Uniform Tax Rate: The government has introduced a flat 12.5% tax rate for all types of long-term capital gains, regardless of the asset class. Previously, the rate varied based on the asset type.

Removal of Indexation: The benefit of adjusting the purchase price of an asset for inflation (indexation) has been removed for all assets. 

Indexation is a method used to adjust the purchase price of an asset (like property or gold) for inflation over the years. This adjusted price is then used to calculate capital gains. Previously, long-term capital gains from selling property, gold, or other unlisted assets were taxed at 20%, but you could use indexation to reduce your taxable profit. The new rule simplifies the tax structure by setting a flat 12.5% tax rate for all long-term capital gains. However, it removes the indexation benefit.

Increased Exemption Limit: The tax-free limit for long-term capital gains on equity-related investments has been raised from Rs 1 lakh to Rs. 1.25 lakh.

Changes for Bonds and Debentures

Listed Bonds and Debentures: The tax rate for these has been reduced to 12.5% without indexation benefits.

Unlisted Bonds and Debentures: These will be taxed at the applicable income tax slab rate, similar to other debt instruments.

Parity for Residents and Non-Residents: The tax treatment for capital gains has been aligned for both resident and non-resident taxpayers.

Revised Definition of Specified Mutual Funds: The criteria for classifying mutual funds as 'specified' for tax purposes has been changed.

 Dr. Suresh Surana, a Chartered Accountant, explains this further: 

The category of specified mutual funds has now been defined under Section 50AA to include:-

(a) a Mutual Fund by whatever name called, which invests more than 65% of its total proceeds in debt and money market instruments; or

(b) a fund which invests 65% or more of its total proceeds in units of a fund referred to in sub-clause (a).

"Following the budget, equity-oriented mutual funds that have more than 65% exposure to equities will attract higher capital gains tax. If an investor holds these funds for less than a year, an STCG of 20% will be applicable which is higher than the previous rate of 15%. Meanwhile, if the holding period is longer than a year, it will attract a LTCG of 12.5% compared to the previous rate of 10%.Debt-oriented mutual funds that comprise more than 65% of debt instruments will attract a slab rate irrespective of the holding period.

At the same time, other investments like gold funds, international funds, and some hybrid funds will attract the slab rate if the holding period is less than 24 months. Whereas, if the holding period is more than 24 months, an LTCG rate of 12.5% will be applicable compared to the slab rate that was applicable previously," said Upstox in a note. 

While the above proposals would result in simplification, there are far reaching implications.

"These include higher tax rates for both long term capital gains and short term capital gains in case of STT paid listed equity shares and units of equity-oriented fund. In case of immovable property, unlisted shares, gold and bonds, while the tax rate for long term capital gain has been lowered from 20% to 12.5%, the benefit of indexation would no longer be available. In case of non-resident tax payers, there is an increase in tax rate on long term capital gain from transfer of listed and unlisted shares. On the positive front, there is a reduction in the holding period from 36 months to 24 months in case of bonds, gold, etc," said Surana.