The government has rolled out significant changes to the capital gains tax framework that are expected to impact a wide range of investors.
Beginning 24 July, new tax rates on capital gains for various asset classes will be implemented. Indexation benefits have been removed across all asset classes.
Finance minister Nirmala Sitharaman in her Union budget for 2024-25 increased the short-term capital gains tax on certain financial assets to 20% from 15%. The long-term capital gains tax on all financial and non-financial assets will attract a tax rate of 12.5%.
Mintdecodes how different asset classes will be taxed and what the changes means for investors.
For stocks and equity mutual funds, the short-term capital gains tax rate has been increased to 20% from 15%, while the long-term capital gains tax rate has been increased to 12.5% from 10%. At the same time, the exemption limit has been increased from ₹1 lakh to ₹1.25 lakh.
“The move will nudge more long-term investing in equities as the taxation on short-term capital gains has been increased,” said Niranjan Avasthi, head of product and marketing at Edelweiss Asset Management.
The mutual fund industry welcomed the clarity in the budget for fund-of-funds and gold/silver exchange-traded funds, or ETFs.
Changes in the previous budget had led to fund-of-funds and gold/silver ETFs getting treated as debt funds for taxation purposes.
Under the new rules, equity fund of funds will be taxed at slab rate of the investor if held for less than 24 months, and the long-term capital gains tax rate of 12.5% will be applicable.
The new rates will be standard across equity FoFs, gold/silver ETFs, and gold funds. For long-term holding to be applicable, 24 months will be the applicable period.
“The requirement of investment of not more than 35% in equity shares has also impacted other funds which are not debt-oriented funds, but invest below 35% in equity shares,” read the memorandum of the Union Budget.
"There was an anomaly for fund-of-funds after the previous budget and this clarity is a welcome step,” said Swarup Mohanty, chief executive officer of Mirae Asset MF.
“We also see some impact for arbitrage funds as there is a hike in securities transaction tax (STT) on the futures and options segment,” said A. Balasubramanian, chief executive officer of Aditya Birla Sun Life Mutual Fund.
The STT on options has been increased from 0.0625% to 0.1% and on futures from 0.0125% to 0.02%.
The removal of indexation benefit is likely to impact real estate investors the most. Indexation had allowed investors to adjust their acquisition price as per inflation, helping them lower their capital gains for taxation purposes.
“This proposal is going to discourage long-term investment in properties and encourage short-term investment,” said Prakash Hegde, a Bengaluru-based chartered accountant. “The saddest part is that people who were already holding it till now will lose the indexation benefit.”
Debt mutual funds will continue to be taxed at the slab rate of the investor. The mutual fund industry had hoped for a reversal of last year’s budget changes on debt funds that had removed indexation benefits.
However, gains from debt funds will continue to be taxed at the slab rate of the investor, regardless of their holding period.
Unlisted investments such as physical gold will now get the benefit of long-term holding period after 2 years of holding. This was 3 years under previous rules.
The new rules will also give investors the benefit of the long-term capital gains tax rate of 12.5%, which has been standardized across asset classes.
Sashind Ningthoukhongjam contributed to this article.
