16th September 2024 (9 Topics)
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Changes in Capital Gains Taxation
Context
India’s Union Budget 2024-25 introduced significant changes in capital gains taxation. These changes aim to standardize tax rules for different types of assets and holding periods, impacting investors across various asset classes.
Key Changes in Capital Gains Taxation:
- Uniform Holding Periods: According to the Union Budget 2024-25, there will now be only two holding periods—12 months and 24 months—to determine whether capital gains are classified as long-term or short-term.
- This means that all listed assets must be held for at least 12 months for the gains to be considered long-term capital gains.
- This change will apply to: Listed stocks, Listed bonds, Equity exchange-traded funds (ETFs), Gold ETFs, Bond ETFs, Real estate investment trusts (REITs) and Infrastructure investment trusts (InvITs)
- For Listed Assets: Short-term capital gains (STCG) and long-term capital gains (LTCG) are now based on a holding period of 12 months.
- For Unlisted and Physical Assets: The holding period to qualify as LTCG is set at 24 months.
- Revised Tax Rates:
- STCG on Certain Financial Assets: Taxed at 20% (previously lower for some assets).
- LTCG on Listed Assets: Taxed at 12.5% (up from 10%).
- LTCG on Other Assets: Taxed at 12.5% without indexation (previously 20% with indexation).
- The new changes in capital gains tax include:
- The long-term capital gains exemption on financial assets has been raised from INR 100,000 (US$1194.3) to INR 125,000 (US$1492.9) per year.
- Listed financial assets held for more than a year are now considered long-term.
- Unlisted financial assets and all non-financial assets must be held for at least two years to be considered long-term.
- Unlisted bonds, debentures, debt mutual funds, and market-linked debentures will be taxed on capital gains at the applicable rates, regardless of the holding period.
- Removal of Indexation Benefit:
- Indexation adjusts the purchase price of an asset for inflation. From July 23, 2024, indexation will no longer apply to calculate capital gains, except for properties sold before this date, where taxpayers can choose between paying 20% with indexation or 12.5% without it.
- Exemption Limits and Options:
- Section 54: Exemption on LTCG from selling residential property if reinvested in another residential property within specified timeframes.
- Section 54EC: Exemption on LTCG from selling land/buildings if invested in specified bonds within six months.
- Section 54F: Exemption on LTCG from selling all assets (excluding residential property) if proceeds are reinvested in a residential property.
- Impact on Non-Resident Indians (NRIs): NRIs are affected by the new rules based on their residential status. They will face changes in capital gains tax rates from July 23, 2024.
Global Comparison:
- Singapore, Mauritius, Oman: No capital gains tax.
- US: Capital gains taxed at 0%, 15%, or 20%, depending on income.
- China: 20% tax on capital gains from non-share assets; shares are exempt.
- Brazil: Progressive tax rates from 15% to 22.5% based on the amount of gain.
- Japan: Total capital gains tax rate of 20.315% (15.315% national and 5% local).
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Fact Box: Short-Term Capital Gains (STCG) vs. Long-Term Capital Gains (LTCG)
1. Short-Term Capital Gains (STCG): Profits from selling an asset that has been held for a short period.
2. Long-Term Capital Gains (LTCG): Profits from selling an asset that has been held for a longer period.
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