Budget 2024: The Capital gains sphere has become very complicated due to amendments made in isolation over the years in laws relating to holding periods and taxation of various asset classes.
Finance Minister Nirmala Sitharaman, in her Budget 2024, has proposed some changes in the capital gains sphere to make the taxation of capital gains rational.
Let us discuss the amendments proposed in the taxation of debt and bullion products.
For a long time, all mutual fund schemes were classified into two categories—equity and non-equity schemes—which included debt funds of all variations and bullion ETF/saving funds. The long-term capital gains in the first category were taxed at a flat rate of 10% over the initial ₹1 lakh, which was taxed at a zero rate. Short-term capital gains in these categories were taxed at 15%. This has, however, changed from this year.
For the second category, the cost was allowed to be indexed using the cost inflation index and the indexed long-term capital gains were taxed at 20%, whereas the short-term capital gains were included in your income and taxed at your slab rate.
The qualifying period for making a second category of the scheme long-term was 36 months until last year, when the distinction based on holding period was eliminated for schemes where the equity component did not exceed 35% of the corpus. This created a third category of mutual fund scheme profit, which was treated as short-term capital gains and taxed at the slab rate applicable to the taxpayer. These provisions applied to all the units of particular mutual fund schemes bought after March 31, 2023.
Market-linked debentures were also proposed to be taxed the same way. The creation of a third category created problems for investors in bullion ETFs and saving funds. Profits on these schemes, which, really speaking, were debt schemes, but profits thereon, are now taxed as short-term capital gains at slab rates irrespective of the holding period.
To rectify the drafting error, a proper definition of a debt fund is proposed to replace the earlier definition.
To remove the anomaly created by last year’s amendment, the FM proposed referring to the level of investments in debt for the third category of mutual fund schemes instead of the level of investment in domestic equity shares.
She proposed that all schemes with more than 65 % debt will fall in the third category, where profits are treated as short-term and taxed at the slab rate. She has also proposed taxing profits on unlisted bonds and debentures as short-term capital gains irrespective of their holding period.
The second category of mutual fund schemes, where neither the equity nor the debt component exceeds 65%, will become long-term after 24 months instead of 36 months earlier and be taxed at a flat rate of 12.50%. The short-term capital gains will continue to be taxed at your slab rates.
The finance minister has proposed to do away with indexation benefits for long-term capital assets of all the categories, such as taxation of long-term capital gains on listed shares and equity mutual funds. Moreover, she has proposed a uniform tax rate of 12.5% for long-term capital gains on the sale of all the categories of assets. Short-term capital gains of the second category of mutual funds will continue to be taxed at the slab rate applicable to you.
The Union Finance Minister has also proposed that all the listed securities will become long-term assets after 12 months, whereas the other assets will become long-term after 24 months.
With amendments proposed to remove the anomaly created by last year’s amendment, the bullion ETF and saving funds will be treated like units of a second category of mutual fund schemes, except that the ETFs will become long-term capital assets after 12 months. Still, the bullion saving funds will become long-term capital assets after 24 months.
Your investments in Sovereign Gold Bonds will become long-term capital assets after 12 months, and the physical gold will also become a long-term capital asset after 24 months.
Balwant Jain is a tax and investment expert and can be reached at jainbalwant@gmail.com and on @jainbalwant on X.
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