The Finance Minister delivered an action packed Union budget, at least from the point of view of capital gains taxes. Both the holding periods for long term capital gains and capital gains have been rationalized.
Let’s find out more about these changes in this post.
Simplification of holding period for Long Term gains
Earlier, for capital gains to qualify as LTCG, there were different holding periods (12 months/24 months/36 months) for different kinds of assets.
Now, there will only be 2 holding periods. 12 months and 24 months.
For listed assets: Holding period of 12 months for the gains to quality as long-term capital gains. This will apply to
- Listed stocks
- Listed bonds
- Equity ETFs
- Gold ETFs
- Bond ETFs
- REITs
- InVIT
- Equity mutual funds
“Listed” means assets listed on the recognized stock exchanges in India.
Equity mutual funds may seem like an aberration here since equity MFs are not listed. However, Section 2 (42A) first proviso allows a long-term holding period of 12 months for equity mutual funds.
For unlisted assets: Holding period of 24 months for the gains to qualify as long-term capital gains. This includes
- Real Estate
- Gold
- Unlisted shares (even shares listed abroad shall be considered unlisted)
- Gold mutual funds
- Debt mutual fund units bought on or before March 31, 2023.
- Foreign Equity funds
Additionally, there are assets which will never qualify for Long-term capital gains taxation, irrespective of the holding period. All gains on sale of such investments, irrespective of the holding period, shall qualify as short-term capital gains and be taxed at your slab rate.
- Debt funds units (bought after March 31, 2023)
- Market linked debenture
- An unlisted bond or debenture that is sold or redeemed on or after July 23, 2024.
Budget 2024: How will capital gains be taxed?
Short-term capital gains shall be taxed at your slab rate. The only exception is equity and equity mutual funds that will be taxed at 20% (increased from 15%), irrespective of your tax slab.
Long-term capital gains shall be taxed at flat 12.5% without indexation. Earlier, for most assets, the long-term capital gains were taxed at 20% after indexation. However, with a proposed change to Section 48, the concept of indexation has been done away with.
Please note these changes are prospective. This means, if you have already sold an asset in this financial year before July 23, 2024, and booked STCG/LTCG, the older tax rates shall apply. The revised tax rates shall apply to sale of assets on or after July 23, 2024.
Disclaimer: These above tabulations are based on my reading of budget proposals and there may be gaps in my understanding. Please consult a chartered accountant before making any redemption decisions.
What if I sold between April 1, 2024 and July 22, 2024?
This question arises because the budget is not for the full financial year. Plus, these proposed changes are prospective i.e. apply to asset sales on or after July 23, 2024.
Hence, if you sold in FY2025 before July 23, 2024, the old tax rates will apply.
Let’s consider the example of debt mutual fund units.
Now, for real estate
Real Estate: Negative for non-performing properties
Think this change is much bigger than changes to taxation of stocks and equity mutual funds.
Until now: For properties held for over 2 years, the resulting long term capital gains were taxed at 20% after indexation.
The change: For properties held for over 2 years, the resulting long term capital gains were taxed at 12.5% after indexation.
Well, it is difficult to say now whether you are better off or worse off with the proposed change. Depending on the levels of CII and growth in the value of the property in the future, the answer can change.
However, this is a big negative if you have been holding a non-performing property.
Let’s say you bought a property for Rs 50 lacs in FY2012. CII in FY2012 was 184. CII in FY2025 is 363. The value of the property has not appreciated much over the last 12 years and the current value is only Rs 60 lacs.
Now, consider 2 scenarios.
#1 You sold before July 23, 2024
You will get the benefit of indexation.
Indexed cost of purchase = Rs 50 lacs X 363/184 = Rs 98.6 lacs
LTCG = Sale price – Indexed cost of Purchase = Rs 60 lacs – Rs 98.6 lacs = -38.6 lacs
So, you have booked a loss of 38.6 lacs. Since there is no gain, you don’t have to pay any tax.
Not only that, you can also utilize this loss to set off LTCG from the sale of other assets.
#2 You sold on or after July 23, 2024
No concept of indexation.
LTCG = Sale price – Cost = Rs 60 lacs – Rs 50 lacs = Rs 10 lacs
Now, you must pay 12.5% tax on this gain of Rs 10 lacs.
Total tax liability of Rs 1.25 lacs.
Gold Mutual Funds and Foreign Equity Funds: A surprise beneficiary
This is a very positive surprise.
In March 2023, the taxation of debt mutual funds became adverse. For units bought after March 31, 2023, all gains were to be treated as short-term capital gains. To be taxed at your slab rate. The concept of long-term capital gains for debt funds was removed.
And given the way debt mutual funds were defined, gold mutual funds and foreign equity funds were caught in the line of fire.
The definition for “specified mutual funds” (given in Section 50AA) was mutual fund with less than 35% domestic equity. While the intent was to change taxation of debt funds, gold funds and foreign equity funds were hurt too. Why? Because gold funds and foreign equity funds don’t invest in domestic equity.
Fortunately, that has changed now. The Budget 2024 proposes to change the definition of “specified mutual funds” to mutual funds that invest more than 65% of its total proceeds in debt and money market instruments.
Now, gold funds and foreign equity funds don’t invest in debt and money market instruments too. Thus, these won’t be considered “specified mutual funds”.
With this change, gold and foreign equity funds get back their eligibility for long term capital gains.
Long-term capital gains on the sale of gold and foreign equity funds shall be taxed at 12.5%.
An interesting point: While I can’t fathom the reason, this change of definition for “specified mutual funds” shall be applicable on any sale of MF units from April 1, 2025 (or FY2026). AND not on sale of MF units in the current financial year (FY2025: until March 31, 2025). Hence, if you were planning to sell gold MF or foreign equity funds, do consider this point.
How do I view these changes?
The capital gains taxation becomes much simpler. With respect to holding period or capital gains tax rates. No doubt about that.
However, an increase in the capital gains tax rate can’t be considered a positive. For stocks and equity mutual funds, the STCG tax rate has been increased from 15% to 20%. And the LTCG tax rate has been increased from 10% to 12.5%. While there is a slight increase in exempt LTCG limit from Rs 1 lac to Rs 1.25 lacs per annum. Clearly, a negative for stocks and equity mutual funds.
About real estate, whether 12.5% without indexation is better or 20% with indexation is better, this will depend on CII levels and the growth in value of the property. But if your real estate investment has not done well, this is a big negative.
Positive news to gold funds and foreign equity funds.
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This post is for education purpose alone and is NOT investment advice. This is not a recommendation to invest or NOT invest in any product. The securities, instruments, or indices quoted are for illustration only and are not recommendatory. My views may be biased, and I may choose not to focus on aspects that you consider important. Your financial goals may be different. You may have a different risk profile. You may be in a different life stage than I am in. Hence, you must NOT base your investment decisions based on my writings. There is no one-size-fits-all solution in investments. What may be a good investment for certain investors may NOT be good for others. And vice versa. Therefore, read and understand the product terms and conditions and consider your risk profile, requirements, and suitability before investing in any investment product or following an investment approach.
