Capital Gains Tax Overhaul and Its Implications for Investors
The Union Budget for 2024-25 has introduced significant changes to the capital gains tax framework, which present both challenges and benefits for investors. While some of the changes, such as the removal of the indexation benefit on property sales and higher taxes on equity gains, may initially seem unfavorable, there are several positive aspects worth considering.
Higher Exemption Limit on Equity Gains
One of the key changes is the increase in the exemption limit on gains from equities. Previously set at ₹1,00,000, this limit has now been raised to ₹1.25 lakh. This change provides some relief to investors by allowing them to earn a higher amount of tax-free capital gains from their equity investments.
Reduced LTCG Tax on Property and Gold
Another significant change is the reduction of the long-term capital gains (LTCG) tax rate from 20% to 12.5% for certain asset classes, including property and gold. This reduction could be particularly advantageous for sellers of these assets, depending on the period of holding and the gains accrued. For instance, if a property’s value has appreciated more than the inflation rate, the lower tax rate can result in a better net gain for the seller.
Uniform Rates and Standardized Holding Period
The budget also introduces uniformity in the taxation of different asset classes. The holding period required to qualify for long-term capital gains has been standardized: one year for listed assets and two years for other assets. This change simplifies tax computations and provides greater clarity in the tax regime.
Additionally, long-term capital gains on both listed and unlisted equities are now taxed at a uniform rate of 12.5%. This simplification is intended to streamline the tax process and make it easier for investors to understand their tax liabilities.
Krishna Patwari, Founder of Wealth Wisdom India Pvt Ltd, commented on these changes, saying, “The budget places a strong emphasis on simplifying and rationalizing capital gains tax. The Finance Minister’s proposal to set a uniform 20% tax rate for short-term gains on financial assets, along with a reduced 12.5% rate for long-term gains on financial assets, is a significant shift.”
He further explained that “Previously, long-term gains on unlisted shares were taxed at 20%. This reduction makes unlisted shares a more appealing investment, potentially boosting investor interest and improving liquidity in this segment.”
Narinder Wadhwa, Managing Director of SKI Capital, also sees the changes positively. He stated, “The simplification of capital gains taxation, with a uniform rate of 20% for short-term and 12.5% for certain long-term gains, is likely to be viewed positively by investors, providing clarity and potentially increasing investment activity.”
Other Positive Takeaways
The Budget has also addressed anomalies in the taxation of certain funds. For example, gold mutual funds, gold ETFs, and international equity funds will now benefit from the new LTCG tax rate if held for over 24 months, making them more attractive to investors.
In summary, despite some negative impacts, the changes to capital gains tax in the 2024-25 Budget offer several advantages. These include higher exemption limits, lower LTCG rates for certain assets, and simplified tax structures, all of which are designed to encourage investment and provide clarity for taxpayers.
