Union Budget 2024: Capital Gains Tax Regime rejigged. STCG rates hiked to 20% on certain assets, LTCG up to 12.5%

Union Budget:  Union Budget: FM Nirmala Sitharaman on Tuesday rejigged the Capital Gains Tax Regime to some extent by tweaking short term gains and Long term capital gains tax rates. The FM proposed to increase short term gains on certain financial assets will be 20 percent, while rest will be remain as is. 
Under the Long term capital gains, the rate was hiked from 10% to 12.5%. She added listed financial assets held for more than a year will be classified as long term. 

Various types of assets, including equity, debt, real estate, and more, are subject to different capital gains tax rates and holding periods. These rates and periods ultimately dictate whether your investment gains are classified as short-term or long-term for taxation purposes. 

Different types of assets such as equity, debt, and real estate are subject to varying capital gains tax rates and holding periods. These rates and periods dictate whether your investment gains are classified as short-term or long-term. Additionally, understanding these distinctions is crucial for effective tax planning and investment decision-making.

Sandeep Chilana Managing Partner, CCLaw, said: “The FM has proposed increase in rate of tax on both short-term and long-term gains from certain financial assets. In the past, substantial investments have been made by the retail investors in financial markets. Changes 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."

It's important to understand that according to international definitions, the sale of various assets such as heavy machinery, patents, precious watches, jewelry, or even highly profitable antique items can be classified as capital gains, subject to the tax limits set by individual governments.

In the context of India, multiple governing bodies have typically chosen to impose relatively high tax rates on capital gains. This poses a significant challenge for many middle-class households, especially during property transactions. However, recent trends suggest that an increasing number of individuals involved in stock market activities may also be subject to Capital Gains Tax (CGT).

Experts believe that rationalising and standardising the capital gains regime will benefit the investor community by introducing a uniform holding period across domestic equities and mutual funds. This change is expected to encourage higher compliance. Capital gains are now taxed from 10 percent to the highest nominal rate of 30 percent, depending on the holding period, which varies from one to three years. For example, short-term capital gains (STCG) tax on listed equity shares or units of equity-oriented mutual funds held for less than a year is 15 percent, while long-term capital gains (LTCG) tax after a year is 10 percent on gains exceeding Rs 1 lakh annually.

In the financial year (FY) 2023-24, the government earned a total of Rs 9,72,224 crore (net of refund) from Securities Transaction Tax (STT). According to industry estimates, the revenue generated from Long-Term Capital Gains (LTCG) taxes is expected to be substantially lower than the amount collected from STT.

“The government is not collecting that much money via LTCG as Indians, who are mostly F&O investors, are paying STT. So, mutual fund investors and some serious stock market participants come under the LTCG bracket. It would be better to continue with the STT and abolish LTCG,” said D Muthukrishnan, a Chennai-based mutual fund distributor and a Certified Financial Planner (CFP).