Table of Contents
Introduction
When the new tax regime comprising capital gains tax was introduced four years ago, people were delighted to note that their tax liabilities had come down and that they no longer needed to lock up their funds in tax-saving instruments. But now not everyone shares this exuberance, though. Many investors are unhappy following the recent budget proposal for significant changes to the STCG and LTCG tax rates for various listed and unlisted assets implemented in India, effective July 23, 2024.
Understanding new CAPITAL GAINS TAX RATES
I have witnessed and been part of some lengthy discussions on the subject in various forums, social circles, etc. Participation in these discussions has been from all corners—those who have plans to buy/sell their properties and also those who have no such plans yet are academically inclined to learn or share opinions.
In the entire discussion, what emerged clearly is that there is confusion all around on the subject. Even some clarifications coming from the government were indicative of the fact that all the permutations/combinations were not considered while formulating the changes, and a lot is likely to depend on the interpretation of the advising community.
To ease out the apprehensions of existing property owners and to extend the benefits to everyone, the government later made a provision for taxpayers to choose the most beneficial option from the two, i.e., taxation at 20% after indexation or at 12.5% without indexation. Let’s first look at a detailed breakdown of the new tax rates and holding periods to know what has changed:
Listed Assets
- Stocks/Equity Mutual Funds: The STCG rate for stocks has increased from 15% to 20%. The holding period remains unchanged at 12 months for the short-term gains and more than 12 months for the long-term gains. The LTCG rate has also increased, from 10% to 12.50%.
- Listed Bonds: The STCG rate for listed bonds is now 20%, compared to the earlier slab rate. The holding period remains at 12 months, while the LTCG rate has increased from 10% to 12.50%.
- REITs/InVITs: Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InVITs) now have a higher STCG tax rate of 20%, up from 15%. The holding period has been standardized to 12 months from 36 months for those investing 90% in equity ETFs. The LTCG tax rate has also increased from 10% to 12.50%.
- Debt and Non-Equity Mutual Funds: The tax rate for both STCG and LTCG for debt and non-equity mutual funds continues to be determined by the individual’s tax slab rate. The holding period criteria have been modified to 24 months, distinguishing between STCG and LTCG, which was previously the same.
- Equity Funds of Funds (FoFs):
- Equity FoFs will now face a 20% STCG rate; however, it was levied as per the individual’s slab rate earlier. The holding period has been adjusted at par with debt funds, and the LTCG rate is now 12.50%, up from the previous slab rate.
- Overseas Funds of Funds (FoFs): STCG for foreign FOF will continue to be applicable at slab rates, while the LTCG rate is now 12.50%, which was earlier at slab rates. The holding period has been reduced from 36 months to 24 months.
- Gold/Silver ETFs: The STCG rate for gold and silver ETFs is now 20%, changing from the slab rate earlier, while the LTCG rate has increased to 12.50%. The holding period has been brought down to 12 months from earlier 36 months.
- Gold Funds: The rate for gold funds will continue to be the same as the slab rate for STCG, while the LTCG rate is now 12.50% as against the slab rate earlier. The holding period for LTCG is now 24 months.
Unlisted Assets
- Real Estate (Physical): The rates for STCG remain based on the slab rate. The holding period is at 24 months with the LTCG rate reduced to 12.50% (without indexation) from earlier 20% (with indexation).
- Unlisted Debentures/Bonds: The rates for unlisted debentures/bonds will follow the slab rate for both STCG and LTCG. The holding period has been adjusted to 24 months from earlier 36 months.
- Physical Gold: The rate for physical gold continues to follow the slab rate for STCG, while the LTCG rate is now 12.50% (without indexation), down from 20% (with indexation) earlier. The holding period has been reduced from 36 months to 24 months.
- Unlisted Stocks: Tax rates for unlisted shares will remain the same as the slab rate for STCG. The holding period also remains 24 months. However, the LTCG has gone up from 10% to 12.5%
These changes apply to assets sold after July 23, 2024. The modifications in tax rates and holding periods aim to streamline the tax structure and bring uniformity across various asset classes.
Is everyone at a loss
While the changes or confusion surrounding the indexation benefits, etc. has created lots of discussion, the figures show that everyone is not at a loss. To begin with, the small investors having an income of up to Rs 2.25 lac per annum from long-term capital gains from listed equity/mutual funds pay the same amount as was being paid earlier, with tax-free gains increasing from earlier Rs. 1 lac to Rs. 1.25 lac. The increased tax on STCG will however pinch speculators. However, all is not lost, even in the fixed asset landscape. The calculation shows that there are instances where the benefits of the proposed system will be substantial. For others, the good news is that Section 54 benefits are still available.
Effect on Real Estate
There are a lot of rumours about the possibility of undervaluing the property prices by potential sellers to save tax or slow down in the real estate market by removing the indexation benefits. Since my posts are based on facts and figures, I generally stay away from extending opinions or making predictions, but to put to rest the above speculation, I must add that, in my opinion, this move of the government will not only increase property investment but also ensure the number of transactions going up. My prediction is based on two facts:
- Every investor would want to avail of Section 54 benefits for so long as they are available to the investor, and
- Rotating real estate will ensure markup of the purchase cost for the new property for determination of capital gains.
Need for a relook
Last but not least, buying a property for end use and handing it over to the next generations for use will have no problems, though, I feel the adage of wise people living in rented property (first half skipped intentionally) may appear more relevant in the longer term. The investors will need to go back to the basics of planning the requirements.
In light of these changes to the tax regime, the role of financial advisors has become increasingly crucial for investors navigating the new landscape. Remember that the option to choose between 20% tax with indexation and 12.5% tax without indexation is applicable on properties purchased before July 23, 2024 and any purchase after this date will essentially be taxed as per the new system of taxation.
Conclusion
The complexity and breadth of the adjustments, spanning various asset classes,R have introduced a level of intricacy that can be challenging to comprehend without expert guidance. Financial advisors can help investors strategize to minimize tax liabilities, optimize returns, and make informed decisions about asset allocation and timing of transactions. Consulting a financial advisor can provide clarity and confidence, ensuring that investment plans are both tax-efficient and aligned with long-term objectives in this evolving regulatory environment.
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