The budget for 2024-25 has increased the long-term capital gains (LTCG) tax on all financial and non-financial assets to 12.5% from 10%. It has also hiked the exemption limit for LTCG tax to Rs 1.25 lakh from Rs 1 lakh, thereby giving an effective incremental tax benefit of Rs 3,125 to small investors.
All listed financial assets held for more than a year will be classified as long-term, while unlisted financial assets and all non-financial assets will have to be held for at least two years to be classified as long-term, the finance minister said. The Budget also increased the short-term capital gains (STCG) tax from 15% to 20%.
At present, shares or equity-oriented mutual funds held for more than a year are subject to capital gains tax at 10% if LTCG exceeds Rs 1 lakh in a financial year.
“A standard rate of 12.5% for taxation of LTCG is proposed while simultaneously withdrawing the benefit of indexation that was earlier available in most of the cases,” said Vishwas Panjiar, partner, Nangia Andersen LLP.
The period of holding conditions has been streamlined to only two holding periods for assets: 12 months for listed securities and 24 months for other assets thereby removing apparent disparity. For example, the period of holding for units of listed business trusts will now be at par with listed equity shares at 12 months instead of 36 months that was applicable earlier.
Amit Maheshwari, tax partner, AKM Global, a tax and consulting firm, said that the introduction of a uniform 12.5% tax on LTCG, regardless of asset type, promotes fairness and simplifies tax calculation but will hit investments into assets such as real estate, gold, listed equities, etc.
“The 20% tax on STCG gains is a dampener though it may incentivise long-term investments. This could potentially retain capital flows into the stock market and encourage a more stable investment environment. The increased exemption limit for LTCG provides relief to individual investors and encourages savings,” said Maheshwari.
With the marginal increase in LTCG from 10% to 12.5%, 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 tax from 15% to 20% will impact short-term equity investors.
Feroze Azeez, deputy CEO, Anand Rathi Wealth, said although the tax rates have marginally increased, equity mutual funds remain an attractive investment opportunity compared to other asset classes. “We do not anticipate that the change in tax rates will significantly affect the flows towards equity mutual funds,” he said.
However, Naveen Kukreja, co-founder and CEO, Paisabazaar, said the proposal to increase LTCG tax on equities was a dampener. “Instead of increasing LTCG tax on equities, the government could have increased the holding period for LTCG tax from 1 year to 3 years to incentivise long-term investments,” he said.
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