Anxious over capital gains tax tweaks? I-T dept releases FAQs to clear doubts on STCG, LTCG & holding periods

In Budget 2024, several changes were rolled out by Finance Minister Nirmala Sitharaman regarding standard deduction, securities transaction tax (STT), TDS (tax deducted at source) and the revision of tax slab rates under the new tax regime. However, one key change that has struck a chord with almost every taxpayer revolves around capital gains tax.

Not only are the rates of capital gains tax tweaked, but the holding period is also rationalised. Now, to clear the air, the income tax (I-T) department released a set of frequently asked questions (FAQs) which are aimed at clearing taxpayers' doubts.

These changes were introduced to simplify the tax structure and increase compliance by easing computation, filing, and record maintenance.

Here are some of the frequently asked questions:

What are the key changes introduced in Budget 2024 with regard to taxation of capital gains?

The taxation of capital gains has been rationalised and simplified. There are five broad parameters to this rationalisation and simplification. These include:

1. There are only two holding periods now, viz. one year and two years.

2. Long-term capital gains (LTCG) tax on the sale of listed equity shares, equity-oriented mutual funds and business trust has been raised from 10 per cent to 12.5 per cent.

3. Long-term capital gains on all other long-term capital assets (section 112) have been reduced from 20 per cent to 12.5 per cent. But indexation has been removed.

4. Short-term capital gains (section 111A) from the sale of listed equity shares, equity-oriented mutual funds and business trust have been increased from 15 per cent to 20 per cent.

5. There is no change in roll-over benefits.

When will the new taxation provisions come into force?

The new provisions for taxation of capital gains came into force on 23.7.2024 and will apply to any transfer made on or after 23.7.2024.

How has the holding period been simplified?

Earlier, there were three holding periods for considering an asset to be a long-term capital asset. Now, the holding period has been simplified.

There are only two holding periods - for listed securities, it is one year, and for all other assets, it is two years.

Who stands to benefit from the change in holding period?

The holding period of all listed assets will now be one year. Therefore, the holding period for listed units of business trusts (ReITs, InVITs) is reduced from 36 to 12 months.

The holding period of gold and unlisted securities (other than unlisted shares) is also reduced from 36 months to 24 months.

What about the holding period of immovable property and unlisted shares?

The holding period of immovable property and unlisted shares remains the same as earlier which is 24 months.

Is there any change in the exemption limit for long-term capital gains?

The exemption limit of 1 lakh for LTCG on these assets has been raised to ₹1.25 lakh. This increased exemption limit will apply for FY 2024-25 and subsequent years.

What are the changes in the rate structure for other long-term capital gains?

The rate for other long-term capital gains on all assets has been rationalised to 12.5 per cent without indexation. This was 20 per cent earlier with indexation. This will help in simplifying the taxation of capital gains and their easy computation.

Who will benefit by change in rate from 20 per cent (with indexation) to 12.5 per cent (without indexation)?

The reduction in the rate will benefit all categories of assets. In most of the cases, the taxpayers will benefit substantially. But where the gain is limited vis-a vis inflation, the benefit will also be limited or absent in a few cases.

Can the taxpayer continue to avail the roll-over benefits on capital gains?

Yes. The roll-over benefits already available under the IT Act have not changed. Therefore, taxpayers who want to save on LTCG tax even with low rates can continue to avail themselves of the roll-over benefits upon fulfilment of conditions as applicable.

What is the amount up to which roll-over benefit is available?

Investment of capital gains in 54EC bonds (up to ₹50 lakh) and in other cases, the capital gain is exempt from tax, subject to certain specified conditions.