ITR filing: How to minimise your capital gains tax after 2024 budget

The Union Budget 2024 has brought significant changes to the capital gains tax framework, impacting both short-term and long-term investors. So how do you cushion the impact?
 

Understanding the capital gain tax
 

Capital gains tax is levied on profits made from the sale of capital assets such as stocks, mutual funds, real estate, and gold. The tax rate varies based on the type of asset and the holding period.
 

So what are the changes? And what will be the impact?

 

Feroze Azeez, Deputy CEO at Anand Rathi Wealth Limited, explains, “With the marginal increase in LTCG from 10 per cent to 12.5 per cent (for equities), long-term investors might be paying slightly higher taxes. However, with the exemption limit raised to ~1.25 lakh, small investors will see modest benefits. The increase of STCG from 15 per cent to 20 per cent will impact short-term equity investors. Although the tax rates are marginally increased, equity mutual funds remain an attractive investment opportunity compared to other asset classes. Therefore, we do not anticipate that the change in tax rates will significantly affect the flows towards equity mutual funds.”

 

Experts suggest strategies to minimise capital gains tax 

 

Hold investments longer: Given the increased STCG rate, investors should consider holding their assets for longer periods to benefit from the lower LTCG rate. 

 

Utilise exemption limits: Investors should take advantage of the increased exemption limit of Rs 1.25 lakh for LTCG, ensuring that they maximise their tax-free gains. 
 

Set off capital losses: Investors can set off their long-term and short-term capital loss against long-term capital gains. This minimises the tax liability and only the difference is subject to the LTCG tax.
 

Invest in tax-saving instruments: Certain investments, such as Equity-Linked Savings Schemes (ELSS) and National Pension System (NPS), offer tax benefits under Section 80C of the Income Tax Act. These can help reduce your overall taxable income, potentially lowering your capital gains tax bracket.
 

Reassess portfolio: Investors should regularly review their portfolios to identify which assets may be more tax-efficient to hold or sell, especially in light of the new tax structure. 
 

Consult financial advisors: Seeking advice from tax professionals or financial advisors can help tailor strategies that align with individual financial goals and tax situations.
 

“In light of fluctuating capital gains tax rates, investors should consider strategic approaches to minimise their tax liability. One effective method is tax-loss harvesting, where you offset gains with losses from underperforming investments. Additionally, holding assets for over a year can qualify them for long-term capital gains rates, which are typically lower than short-term rates. It’s also beneficial to utilise tax-advantaged accounts such as IRAs or 401(k)s, where investments can grow tax-deferred. Diversifying investments and consulting with a financial advisor can help navigate the complexities of the tax code and optimise your strategy. Staying informed about legislative changes is crucial, as it allows you to make timely adjustments to your investment portfolio. Proactive planning and a comprehensive understanding of tax regulations can significantly enhance your after-tax returns,” CA Swapnil Patni, Founder of SPC said.