BUDGET 2024: In a shock to stock market investors, Finance Minister Nirmala Sitharaman on Tuesday announced an increase in both long-term and short-term capital gains tax.
FM Sitharaman said that going forward, short-term capital gains on specific financial assets will be subject to a tax rate of 20%, a 5% increase from the previous rate of 15%. It was clarified that this new rate will only apply to the specified financial assets, while all other financial and non-financial assets will continue to be taxed at their respective applicable rates.
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“Short-term gains on specified financial assets shall henceforth attract a tax rate of 20 per cent instead of 15 per cent, while that on all other financial assets and non-financial assets shall continue to attract the applicable tax rate,” said Nirmala Sitharaman, the Union Finance Minister of India in the budget announcement.
The long-term gains tax rate for all financial and non-financial assets in the financial year 2024-25 will be set at 12.5 per cent. This tax rate adjustment is part of the government’s initiative to support individuals belonging to middle and lower-income brackets by raising the exemption cap for capital gains.
Under the recent Budget 2024, the exemption limit for capital gains has been raised to Rs 1.25 lakh annually, a significant increase from the earlier limit of Rs 1 lakh per year. This move is designed to provide greater relief to taxpayers and promote economic growth.
“Long-term gains on all financial and non-financial assets, on the other hand, will attract a tax rate of 12.5 per cent. For the benefit of the lower and middle-income classes, it is proposed to increase the limit of exemption of capital gains on certain listed financial assets from ₹1 lakh to ₹1.25 lakh per year,” Sitharaman said during her Budget speech.
CA Dr Suresh Surana explains what tweaks in Capital Gains Tax mean:
Holding period for determination of long term or short term capital asset
It is proposed that there will only be two holding periods, 12 months and 24 months, for determining whether the capital gains is short-term capital gains or long term capital gains. For all listed securities (including units of listed business trust), the holding period is proposed to be 12 months and for all other assets, it shall be 24 months. The holding period for bonds, debentures, gold, etc. has been proposed to be reduced from 36 months to 24 months. For unlisted shares and immovable property it shall remain at 24 months.
Rate for Tax on Short term capital gains and Long term capital gains
The rate for short-term capital gain under provisions of section 111A of the Act on STT paid equity shares, units of equity oriented mutual fund and unit of a business trust is proposed to be increased to 20% from the present rate of 15%. Other short-term capital gains shall continue to be taxed at applicable rate.
The rate of long-term capital gains under provisions of various sections is proposed to be kept at 12.5% in respect of all category of assets. This rate earlier was 10% for STT paid listed equity shares, units of equity-oriented fund and business trust under section 112A and for other assets it was 20% with indexation under section 112.
Tax exemption of gains up to Rs. 100,000 has been proposed to be increased to Rs. 125,000 in respect of long-term capital gains under section 112A on STT paid equity shares, units of equity oriented fund and business trust.
For listed bonds and debentures, the rate shall be reduced to 12.5% without indexation from earlier 20% without indexation. Unlisted debentures and unlisted bonds are of the nature of debt instruments and therefore any capital gains on them should be taxed at applicable rate, whether short-term or long-term.
Removal of Indexation benefit
With rationalisation of rate to 12.5%, indexation available under second proviso to section 48 is proposed to be removed for calculation of any long-term capital gains which is presently available for property, gold and other unlisted assets.
Parity of taxation among Residents and Non-Residents
There would be same taxation for resident and non-resident tax payers in respect of capital gains taxation. Consequential amendments have been proposed under relevant sections.
These proposals are proposed to be given effect immediately i.e. with effect from the 23rd of July, 2024
Apart from the above, the provisions of section 50AA of the Income-tax Act, 1961 which provide for taxation of market linked debentures and specified mutual fund units as short-term capital gain without indexation. 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).
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.