Income tax returns: The recently announced Union Budget 2024 has introduced significant amendments to the capital gains tax structure, affecting both short-term and long-term investors. Capital gains tax pertains to the tax imposed on profits generated from the sale of capital assets such as stocks, mutual funds, real estate, and gold. The taxation rate varies depending on the asset classification and the holding duration.
In the Budget, the government proposes a uniform long-term capital gains (LTCG) tax rate of 12.5% for all asset classes, replacing the previous tiered structure. The tax rate for short-term capital gains on equity-related investments has been raised from 15% to 20%. The tax-free limit for long-term capital gains on equity-related investments has also been increased from Rs. 1 lakh to Rs. 1.25 lakh.
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Moreover, the revised holding period now categorizes listed securities as long-term after 12 months, while other assets necessitate a holding period of 24 months.
Furthermore, the indexation benefit, which permitted taxpayers to adjust the purchase price of an asset for inflation, has been eliminated.
In light of the heightened Short-Term Capital Gains (STCG) rate, it is advisable for investors to contemplate retaining their investments for extended durations to capitalise on the reduced Long-Term Capital Gains (LTCG) rate.
Moreover, investors are encouraged to make use of the raised exemption threshold of Rs 1.25 lakh for LTCG, enabling them to optimise their tax-free earnings effectively.
Feroze Azeez, Deputy CEO at Anand Rathi Wealth Limited, said: “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 ~Rs 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.”
Additionally, investors have the option to offset their long-term and short-term capital losses against long-term capital gains. This practice aids in diminishing the tax obligation, ensuring that only the variance is subjected to the LTCG tax.
When considering investment options, it is advisable to explore tax-saving instruments like Equity-Linked Savings Schemes (ELSS) and National Pension System (NPS), which provide tax benefits within Section 80C of the Income Tax Act. These investments have the potential to decrease your taxable income, potentially moving you to a lower capital gains tax bracket.
Regularly reviewing your investment portfolio is crucial to determine which assets are more tax-efficient to hold or divest, particularly given the new tax laws.
It is beneficial to seek guidance from tax specialists or financial advisors when crafting strategies that are aligned with your individual financial objectives and tax circumstances.
Besides, experts also suggested to go for tax-loss harvesting. Tax-loss harvesting is a tax strategy employed to reduce tax obligations by selling investments that have decreased or are decreasing in value. By selling an investment at a loss, investors can leverage that loss to counterbalance capital gains obtained from other investments.
“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,” CA Swapnil Patni, Founder of SPC said.