The Union Budget 2024-25 has significantly revamped the capital gains tax framework, introducing measures that could impact homeowners and investors in varied ways. Among the most notable changes is the removal of the indexation benefit on the sale of property, alongside higher taxes on gains from stocks and equity funds.
The elimination of the indexation benefit is a major shift. Previously, indexation allowed for adjustments of the purchase price of an asset based on inflation, reducing taxable capital gains. Now, while the long-term capital gains (LTCG) tax rate has been reduced from 20% to 12.5%, the entire capital gain amount will be taxed without any adjustment for inflation. This change will affect property owners and gold buyers, with some paying more tax and others less, depending on the period of holding and the gains accrued. Assets purchased before April 1, 2001, will still benefit from indexation.
While some view the removal of the indexation benefit as a potential deterrent to property sales, others believe that the reduced tax rate could increase liquidity in the real estate market. Many property sellers who typically reinvest their gains into new properties may not be significantly affected by the loss of the indexation benefit.
Taxes on equities
The Budget has also raised taxes on both short-term and long-term gains from equities. Short-term gains on equities will now be taxed at 20%, up from 15%, while long-term gains will face a 12.5% tax, up from 10%. Although this increases the tax burden, the exemption limit on long-term gains has been raised from Rs.1 lakh to Rs.1.25 lakh per financial year, providing some relief. Additionally, the securities transaction tax (STT) on trading in futures and options has been increased, raising costs for frequent traders.
The revised capital gains tax framework also aims to discourage short-term trading and encourage long-term investments. The gap between short-term and long-term capital gains tax rates has widened, making long-term holdings more attractive. This aligns with the government’s goal of promoting sustainable wealth creation and reducing speculative trading.
Tax parity
The Budget has also introduced parity in the taxation of different asset classes. The holding period for listed financial assets to qualify as long-term has been standardized to one year, while for unlisted financial assets and non-financial assets, it is two years. This harmonization simplifies the tax framework and aligns the treatment of various assets, such as real estate, gold, and international funds, with equities.
Additionally, anomalies in the taxation of certain mutual funds have been addressed. Gold mutual funds, gold ETFs, and international equity funds will now benefit from the new LTCG rate of 12.5% if held for more than 24 months, eliminating the previous treatment as debt funds. However, multi-asset and balanced hybrid funds, which previously benefited from indexation, will no longer receive this benefit.
Overall, the Budget’s changes to the capital gains tax framework are a mixed bag for homeowners and investors. While some may face higher taxes, others could benefit from reduced rates and simplified rules. Investors and property owners will need to reassess their strategies to navigate these changes effectively.
