Union Budget 2024: Indexation benefit removal a realty check for investors

LTCG on non-financial assets like property will also be taxed at 12.5 per cent, against the earlier 20% post indexation if held for more than three years

Finance Minister Nirmala Sitharaman on Tuesday announced major changes in the capital gains tax regime on various assets, including increasing short-term and long-term capital gains tax on equities.

While long-term capital gains (LTCG) on all financial and non-financial assets will now be taxed at 12.5 per cent, short-term capital gains (STCG) booked in stocks and equity mutual funds will be taxed at 20 per cent compared to 15 per cent earlier.

“The increase in capital gains tax and securities transaction tax is a dampener for the capital markets,” said Sandeep Nayak, ED and CEO of Centrum Broking (Retail), said.

Sitaraman gave investors some relief by increasing the exemption limit on LTCG on equities to Rs 1.25 lakh per year from Rs 1 lakh earlier. “While the increase in STCG tax is sharp, that in LTCG tax is only marginal, considering the rise in the LTCG tax exemption limit,” said V K Vijayakumar, chief investment strategy, Geojit Financial Services.

 

Holding periods changed
 

For all listed securities, the holding period for determining whether LTCG or STCG will apply will henceforth be 12 months. For unlisted assets, it will be 24 months. Key unlisted assets held by investors include property and gold.

“Earlier, a holding period criterion of 36 months also existed, say, for REITs. This has been done away with,” said Deepesh Raghaw, a Sebi-registered investment advisor.

Real estate to be impacted

LTCG on non-financial assets like property will also be taxed at 12.5 per cent, against the earlier 20 per cent, post indexation if held for more than three years. The Budget proposes to do away with the indexation benefits (which factored in inflation to soften the tax incidence) available for long-term assets, including property.

“The move to remove indexation benefits on LTCGs presently available for property, gold, and other unlisted assets as such may have a negative impact as it directly impacts real estate investors,” said Anuj Puri, chairman, ANAROCK Group.

Real estate investors will be impacted under certain circumstances. Take the example of a property bought for Rs 50 lakh and sold 10 years later for Rs 60 lakh. Under the earlier regime, the calculation of capital gains was: sale price minus the indexed cost of acquisition. With indexation benefit over 10 years, the cost of the property could have exceeded the sale price. Hence, the investor would not have paid any tax. Now, he has to pay a 12.5 per cent tax on the Rs 10 lakh gain he makes.

A clarification in the press conference held after the Budget offers some relief to owners of older properties. Finance Secretary T V Somnathan clarified the indexation benefit offered until 2001 would be protected.

Gold funds and foreign funds

In March 2023, when the taxation of debt funds became adverse, gold funds and foreign equity funds were also taxed similarly as the rules said if a fund holds less than 35 per cent domestic equity, it should be taxed as a debt fund.

Now the definition has been changed. The current debt fund taxation rules will only apply if a fund holds 65 per cent or more debt assets.

Gold and foreign equity funds will not be clubbed with debt funds. “The LTCG will now be taxed at 12.5 per cent flat without indexation. Earlier they were being taxed at slab rate,” said Raghaw.

How tax rate changes for major asset classes
 

On listed equity shares and equity-oriented mutual funds (STT paid), STCG to go up from 15% to 20%; LTCG was 10% on capital gains exceeding Rs 1 lakh; proposed rate is 12.5% on capital gains exceeding Rs 1.25 lakh
 

Unlisted equity shares, STCG remains same (normal tax rate); LTCG changes from 20% with indexation to 12.5% without indexation
 

On listed sovereign gold bonds, normal tax rate applies on STCG (no change); LTCG was 20% with indexation or 10% without indexation; proposed rate is 12.5% without indexation
 

On zero coupon bonds, STCG will be at normal tax rate (no change); LTCG will change from 10% without indexation to 12.5% without indexation
 

On listed debentures, STCG remains same (normal tax rate); LTCG to change from 10% without indexation to 12.5% without indexation  
 

Source: Taxmann