Budget 2024: In the recent budget speech, FM Nirmala Sitharaman made announcements regarding the reduction of tax rates for long-term capital gains to 12.5 percent, applicable across all asset categories. Additionally, the exemption threshold for long-term capital gains from the transfer of listed equity shares, equity-oriented funds, and business trusts has been raised from Rs 1 lakh to Rs 1.25 lakhs. While these changes may initially seem positive for the Government's tax proposals, a closer look reveals complexities hidden in the details.
Despite the appearance of simplification, there is a concern that these proposals could actually increase the tax burden for many individuals, overshadowing the initial excitement surrounding these adjustments.
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One major point of contention is the rise in the tax rate for short-term capital gains on the transfer of listed equity shares, units of equity-oriented funds, or units of business trusts from 15% to 20%. Furthermore, the 2.5% increase in long-term capital gains tax on listed financial assets hints at a strategy to generate more direct tax revenue from approximately 148 million demat accounts.
Finer print
Short term gains on listed equity will be subject to a tax rate increase from 15% to 20%. However, the tax rates for all other financial assets and non-financial assets will remain unchanged.
The tax rate on long-term gains for all financial and non-financial assets is proposed to be 12.5%, resulting in a 2.5% increase for listed equity (from the current 10%) and a 7.5% decrease for other assets like house property and unlisted equity shares. Additionally, the indexation benefit has been eliminated for all assets with long-term capital gains.
Impact on stock purchase
Experts have said the recent adjustments in the tax rates for long-term capital gains, short-term capital gains on equity, and Securities Transaction Tax (STT) on futures and options have been implemented to regulate the heightened levels of activity and promote a more sustainable growth trajectory in the stock market.
Besides, the tax tweaks will see more tax outgo.
Adhil Shetty of BankBazaar.com explained: "Assume you purchased shares worth Rs 8 lakh two years ago and sold them at Rs.12 lakh. The total profit generated on the asset is Rs.4 lakh. Since the assets were held for more than a year, LTCG would be applicable on the gains of Rs.4 lakh. Earlier, gains up to Rs.1 lakh were tax-free and the rest were taxed at 10%. In this case, the tax on gains of Rs 4 lakh was calculated as (Rs 4 lakh- Rs 1 lakh)*10% or 10% of Rs 3L, which comes to Rs.30,000."
He added: "As per the new rule, the exemption has been increased from Rs.1L to 1.25L while the tax rate has been increased from 10% to 12.5%. So the gains on the same amount will be (400,000-125,000)*12.5% or 12.5% of Rs.2.75L. This comes to Rs.34,375. Therefore, there’s an increase of Rs 4,375, meaning you are paying almost 15% more tax compared to earlier. Higher the gains, the more will you be paying. If your gains in one year is Rs.10L, then your tax liability goes up from Rs.90,000 to Rs.109,375: an increase of Rs.19,375 or almost 21.5% over your previous tax liability."
Minor savings
The change in exemption is beneficial only in case your gains are below Rs 2.25L. In this case, the increased exemption cancels out the hike in tax. So, if your gains are Rs.2L, then your tax as per the earlier rule would be Rs.10,000 but as per the new rule, it would be marginally less at Rs.9,375, a savings of Rs 625.
Retirement corpus
Shetty further said LTCG is applicable on long-term gains, such as from investments for the education of children or retirement investments.
"This can run into crores at time, especially if you consider retirement corpuses. The tax on gains of Rs.1Cr would be a whopping Rs.12.34 lakh. So long as you withdraw gains of more than Rs.1.25 lakh in one year, this tax would be applicable. So staggering your withdrawals will not help much. This can have significant implications on your retirement planning as you would need to up your corpus by 10-15% to make up for the taxes," he said.
Taming the market
"This Union Budget sets a clear vision for India's economic future, prioritising both growth and fiscal responsibility. The increase in the tax rate on long-term capital gains and short-term capital gains on equity, along with the increase in STT on futures and options, are aimed at moderating currently heightened activity levels and fostering a more sustainable pace of growth in the stock market. We anticipate a small period of adjustment as the market adapts to these new tax measures, but this will ultimately contribute to a sustainable investment landscape with balanced and orderly growth of the capital market," said Shripal Shah, MD & CEO, Kotak Securities.
"In all fairness, markets and the business ecosystem were anticipating some bid at rationalisation of the long term and short-term capital gains tax rates. The drastic revision of STCG from 15% to 20% makes sense given that there have been renewed murmurs vis-a-vis the overheating of the derivatives market. The recent statement by the market regulator that the growth in trading volume has now leapfrogged to a macro level concern from being a micro-one was a big hint that the government was actively looking to temper and moderate the action in the derivatives segment," said Shlok Srivastav, Cofounder & COO, Appreciate.