Budget 2024-2025: Long-term capital gains tax increased to 12.5% from 10%

The Finance Minister today announced changes to the capital gains tax structure in India. The tax on long-term capital gains (profits from selling assets held for more than two year) has been increased from 10 per cent to 12.5 per cent.
 

For listed financial assets, the holding period to qualify for long-term capital gains has been kept at more than one year.

Short-Term Capital Gains Tax: If you sell a financial asset within a year of purchase, it's considered short-term, and the tax rate on the profit is 20 per cent.

In essence, holding an investment for a longer period now attracts a higher tax, while short-term gains continue to be taxed at a higher rate of 20 per cent. 

Short term gains on certain financial assets will now attract a tax rate of 20 per cent, while that on all other financial assets and all non-financial assets shall continue to attract the applicable tax rate.

Long term gains on all financial and non-financial assets will attract a tax rate of 12.5 per cent. Listed financial assets held for more than a year will be classified as long term, while unlisted financial assets and all non-financial assets will have to be held for at least two years to be classified as long-term.

However, unlisted bonds and debentures, debt mutual funds and market linked debentures, irrespective of holding period, however, will attract tax on capital gains at applicable rates. She has also proposed to increase the exemption limit for capital gains on certain financial assets to  Rs 1.25 lakh per year.

"While there are no major benefits for taxation of long term capital gains, there is some benefit for the taxpayers dealing with specific financial assets where the proposal is to tax such short term gains at 20%. Also, the small and marginal taxpayers will also encourage the increase in exemption limit from Rs 1.00 lakh per year to Rs 1.25 lakh per year," said S. R. Patnaik, Partner (Head - Taxation), Cyril Amarchand Mangaldas.

“The FM has proposed increase in rate of tax on both short term and long term gains from certain financial assets. In past few years substantial investments have been made by the retail investors in financial markets. Change in rates of tax will likely have significant impact on the sentiments of retail investors with respect to consistency in tax policy and doubt that even higher taxes may be imposed in future," said Sandeep Chilana Managing Partner, CCLaw.

Over the long term, the higher LTCG tax rate may discourage long-term investments in equity markets, as the after-tax returns would be lower. This could affect the overall growth and liquidity of the market.

Long-term capital gains on securities were previously eliminated by the then Finance Minister when the Government introduced the Securities Transaction Tax (STT) in its place. Now, investors have to deal with both the STT and capital gains tax, which seems like the Government is reneging on its previous commitments.

Additionally, the Finance Minister did not announce any grandfathering of gains accumulated to date. This means the higher rate of 12.5 per cent will apply to all capital gains accrued over the years, not just those from now onward, effectively increasing an investor's tax burden by 20 per cent. I believe the Government should act fairly and at least allow for grandfathering of capital gains accumulated so far," said Ankit Jain, Partner, Ved Jain & Associates