The Union Budget 2024 has increased the tax on short-term gains on specified financial assets to 20 per cent from 15 per cent and increased the tax on long term gains on all financial and non-financial assets to 12.5 per cent from 10 per cent.
Capital gains play a significant role in the Indian investment landscape, and understanding the concepts of Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG) is essential for investors.
Definition of LTCG and STCG in India:
Long-Term Capital Gains (LTCG): In India, LTCG refers to the profit earned from the sale of an asset that has been held for more than 12 months. This includes assets such as stocks, mutual funds, real estate, and gold. LTCG is considered long-term as it represents the appreciation of an asset over a significant period.
Short-Term Capital Gains (STCG): STCG, on the other hand, refers to the profit earned from the sale of an asset that has been held for 12 months or less. STCG is derived from the short-term appreciation of an asset.
Calculation of LTCG and STCG in India:
LTCG Calculation: To calculate LTCG in India, the indexed cost of acquisition is deducted from the selling price. The indexed cost of acquisition is the purchase price adjusted for inflation using the Cost Inflation Index (CII) published by the Income Tax Department. The resulting amount is the taxable LTCG. STCG Calculation: STCG is calculated by subtracting the purchase price from the selling price without any adjustment for inflation.
LTCG AND STCG Tax Rates Increased in Union Budget 2024
The recent changes in the tax rates for short-term and long-term gains have caused quite a stir in the financial world. The Indian government has increased the tax rate on short-term gains from 15 per cent to 20 per cent, and on long-term gains from 10 per cent to 12.5 per cent. This move has been met with mixed reactions from investors and analysts, with some welcoming the increase as a measure to boost government revenue, while others expressing concern about the impact on investment sentiment.
Major changes brought about in the taxation of capital gains by the Finance (No.2) Bill, 2024
The taxation of capital gains has been rationalized and simplified. There are 5 broad parameters to this rationalization and simplification, namely:-
- Holding period has been simplified. There are only two holding periods now, viz. 1 year and 2 year.
- Rates have been rationalized and made uniform for majority of assets.
- Indexation has been done away with for ease of computation with simultaneous reduction of rate from 20% to 12.5%.
- Parity between Resident and Non-resident.
- No change in roll over benefits.
The exemption limit of 1 lakh for LTCG on these assets has also increased to 1.25 lakh Rs. This increased exemption limit will apply for FY 2024-25 and subsequent years.
Impact on Investors
- Higher Tax Liabilities: Investors who earn short-term gains on specified financial assets will now face a higher tax rate of 20% instead of the previous 15%. This means that a larger portion of their gains will be subject to taxation, resulting in higher tax liabilities.
- Increased Tax on Long-Term Gains: The increase in the tax rate on long-term gains from 10% to 12.5% means that investors will have to pay a higher percentage of their profits as tax when they sell their financial or non-financial assets after holding them for more than the specified period.
- Reassessment of Investment Strategies: The higher tax rates may prompt investors to reassess their investment strategies. They may consider holding assets for longer periods to qualify for the lower long-term capital gains tax rate or explore other tax-efficient investment options.
- Impact on Investment Decisions: The increased tax rates on gains may influence investment decisions. Investors may need to factor in the higher tax liabilities when evaluating the potential returns of an investment and consider the after-tax gains when making investment choices.
Investors View
- The new provisions for taxation of capital gains come into force from 23.7.2024 and shall apply to any transfer made on or after 23.7.2024. Short-term gains refer to profits made on investments held for less than three years, while long-term gains are those made on investments held for three years or more. The rationale behind the increase in tax rates is to encourage long-term investments and discourage speculative trading in the stock market.
- By taxing short-term gains at a higher rate, the government aims to incentivize investors to hold on to their investments for a longer period of time, which is seen as more beneficial for the economy in the long run.
- However, critics of the move argue that it could deter foreign investors and domestic retail investors from investing in the stock market, as the higher tax rates could eat into their profits. They also fear that the increase in tax rates could lead to a decrease in trading volumes and liquidity in the stock market, which could have a negative impact on market sentiment and valuations.
- On the other hand, proponents of the increase in tax rates believe that it is a necessary step to increase government revenue and reduce the fiscal deficit. They argue that the higher tax rates on short-term gains will help curb speculative trading and promote a more stable and sustainable investment environment. They also believe that the increase in tax rates on long-term gains is not significant enough to deter long-term investors, who are more focused on the potential returns on their investments rather than the tax implications.
Conclusion
Understanding the concepts of LTCG and STCG is crucial for investors in India as it helps them make informed decisions regarding their investments and tax planning. It is important for investors to stay updated with the latest tax regulations and consult with tax professionals or financial advisors to optimize their investment strategies and minimize their tax liabilities
