Budget 2025 Live Updates: The revision of the Capital Gains Tax regime was a key feature of Budget 2024, impacting investors across various asset classes. Finance Minister Nirmala Sitharaman proposed alterations to the capital gains tax structure, elevating the short-term capital gains tax rate from 15% to 20% and establishing the long-term capital gains tax rate at 12.5%. Moreover, the threshold for exemption on long-term capital gains saw an increase from Rs 1 lakh to Rs 1.25 lakh.
In the July 2024 Budget, the Finance Minister made significant changes to the capital gains tax framework. The indexation benefit on real estate deals was eliminated, and the long-term capital gains tax rate was decreased from 20% to 12.5%. This decision has sparked frustration among property owners, as indexation typically helps decrease tax liability by accounting for inflation when calculating capital gains. The government has since clarified that real estate assets purchased prior to July 23, 2024, will continue to receive indexation benefits.
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However, not all investors were pleased with these modifications. Although the government asserted that the changes were aimed at simplifying taxation, the elimination of indexation provisions for certain asset categories caused widespread concern among investors. In response to the criticism, indexation benefits were partially reinstated for the real estate sector. An update to the Finance Bill of 2024 was proposed to give individuals the option of selecting between a 12.5% long-term capital gains tax rate without indexation or a 20% rate with indexation for property purchased before July 23, 2024.
As Budget 2025 approaches, it is imperative for the government to simplify rather than complicate matters. Implementing any further tax increases or adding more conditions to indexation benefits, which are currently limited to specific asset classes, will only contribute to taxpayers' discontent.
"Reducing the LTCG tax on equities from 12.5% to 10% would leave an additional 2.5% of gains in investors' hands as investable capital. Similarly, reintroducing indexation benefits for debt mutual funds would ensure that investors are taxed only on real gains, making long-term investments in debt markets more attractive," said Manish Bhandari, CEO and Portfolio Manager at Vallum Capital Advisors.
Since the LTCG tax on securities is now at par with other assets, the Securities Transaction Tax (STT) should be abolished, said Niranjan Govindekar, Partner, Corporate Tax, Tax & Regulatory Services, BDO India. "Budget 2024 unexpectedly removed the indexation benefit for all long-term investments in debt funds. It is expected that all investments in debt funds made up to 31 March 2023, would qualify for the indexation benefit as per earlier provisions. The government should amend the law on tax implications on the buyback of shares to allow the cost of the acquisition of shares as a reduction and tax only the net amount as a dividend," Govindekar said.
Avadhi Khandelwal, Adroit Tax Solutions, said: "The removal of indexation benefits on long-term capital gains taxation represents a significant shift in taxation landscape, potentially increasing the tax burden on investors. While the intent may be to simplify the tax system and enhance revenue collection, it also raises concerns about the impact on inflation-adjusted returns for investors and the broader adverse effect on real estate market sentiment and investment patterns. The option whether to opt for the indexed cost method with 20% tax rate or the new tax rate of 12.5% without taking benefit of indexation should also be extended to those who purchased properties after 22nd July 2024 and not just those who purchased before said date."
"To encourage long-term investing in Indian equity markets, the government should consider a 0% Long-Term Capital Gains (LTCG) tax on investments held for more than three years. Additionally, similar to the Rs 50,000 additional deduction available for NPS under Section 80CCD(1B), there should be a separate Rs 50,000 deduction for investments in ELSS (Equity Linked Savings Scheme), distinct from the existing limit under Section 80C. This would further incentivize equity participation while promoting wealth creation through disciplined, long-term investing. Section 80C limit has remained at Rs 1.5L for over a decade. Alternatively, the government can consider increasing this limit factoring inflation as well," said Vishranth Suresh, CEO and co-founder of AssetPlus.
Mehta Securities has pointed out that the transaction costs for stocks in India are excessively high, with the Long-Term Capital Gains (LTCG) tax and Securities Transaction Tax (STT) being perceived as negative factors for market sentiment. In 2004, the LTCG tax was replaced by STT, but in the Union Budget of 2018, the LTCG tax was reintroduced at a rate of 10% on annual gains exceeding Rs 1 lakh, in addition to the existing STT.
Furthermore, the STT for equity and index trades was raised from 0.01% to 0.02% last year. Additionally, the LTCG tax on equity gains above Rs 1.25 lakh (previously Rs 1 lakh) is now taxed at a rate of 12.5%.
"Since the government has been promoting investment, major adjustments to the capital gains tax may deter it. From a broader perspective, maintaining policy stability is crucial during economic slowdown and weakened corporate earnings. Therefore, avoiding further changes to STT or LTCG might be the best approach as frequent adjustments create uncertainty for investors," said Puneet Singhania, Director at Master Trust Group.