'Change in capital gains affects...': Zerodha's Nithin Kamath details Budget impact on stocks, MFs

Zerodha co-founder Nithin Kamath on Thursday unpacked the changes introduced in Budget 2024 that will affect capital gains taxation. These changes, he explains, will impact a broad range of investments, from stocks and mutual funds to unlisted bonds. 

Kamath in an earlier post had pointed how Securities Transaction Tax (STT) changes will make speculation "much more expensive" and long-term investments less attractive. STT on options has been raised from 0.0625% to 0.1% of the option premium, and on futures from 0.0125% to 0.02%. These adjustments, Kamath says, will escalate the cost of trading futures and options, potentially cooling down market activity.

Budget 2024 has introduced sweeping changes to capital gains taxation. For listed shares and equity mutual funds, short-term capital gains (STCG) which were previously taxed at 15%, will now attract a tax rate of 20%, marking a 5% increase. Long-term capital gains (LTCG) from these assets have also seen an increment from 10% to 12.5%, though the holding period remains unchanged at 12 months.

Investors in unlisted and foreign shares will experience a significant shift as well. The LTCG tax on unlisted bonds and foreign shares has been slashed from 20% to 12.5%, while STCG continues to be taxed according to the applicable slab rates. The holding period for these assets to qualify as long-term has been extended to 24 months, aiming to encourage longer-term investments.

Listed bonds have not been spared either. Previously, LTCG on listed bonds were taxed at 10%, but this rate has now increased to 12.5%. STCG taxation remains the same, governed by slab rates. Debt ETFs and mutual funds have undergone a notable change too, with gains from these instruments now being taxed at slab rates, regardless of the holding period, making the taxation more straightforward but potentially more burdensome for investors in higher tax brackets.

Real estate transactions have also felt the impact of these changes. The LTCG tax on the sale of immovable property has been reduced from 20% to 12.5%, although STCG continues to be taxed as per the applicable slab rates. The holding period for these gains to be considered long-term has been standardized to 24 months. Similarly, LTCG from physical gold, previously taxed at 20%, will now be subject to a 12.5% tax rate, with the holding period for LTCG classification reduced from 36 months to 24 months.

These changes will come into effect on 23rd July 2024. Any gains realized before this date will be taxed under the old rules, offering a brief window of transition for investors. In addition to these tax changes, income from buybacks will now be taxable in the hands of the recipient investor, similar to dividend income, with the amount paid for buying shares treated as a capital loss that can be offset against other capital gains. 

Furthermore, interest earned from government securities will be subject to a 10% tax deducted at source (TDS) if the amount exceeds ₹10,000, starting from 1st October 2024.