Today I thought to come with a hot topic for discussion which is majorly affecting common man, even if you are not a business owner or you may be just a salaried employee, the share market related gain or losses are affecting you.

The Indian Union Budget 2024 introduced significant changes to the capital gains tax regime, aiming to simplify the tax structure but also bringing some impactful modifications:

1. The tax authorities have raised the tax rate on short-term capital gains for equity-related investments from 15% to 20%. This applies to assets like stocks and equity mutual funds held for less than 12 months. For other short-term assets, the tax will continue to be levied according to the applicable income tax slab rate.

Example:

You sold ABCL’s 100 shares @ rate of 10 each = 100 * 10 = 1000/- total sale value.

You had purchased these 100 shares at a cost of 500/-. Your holding period is under 1 year.

So, your Short-Term Gain (STG) will be 500/- (1000/- Sale value Less Cost = Gain/Loss)

Then,

You will pay tax for FY -2023-24 = 15% on STG i.e. 500 * 15% = 75 Tax (Up to 22^nd July 2024.)

From July 23^rd, 2024, onwards, (Yes not from 01^st April 2024 onwards, as Finance Minister said, her speech that this will apply to an immediate effect on the day of presenting the budget.)

You will pay tax for FY -2024-25 = 15% on STG i.e. 500 * 20% = 100 Tax (From 23^rd July 2024 Onwards.)

2. They introduced a uniform tax rate of 12.5% for all long-term capital gains, regardless of the asset class. The previous system, which taxed different assets at varying rates, has been replaced by this rate. However, a crucial change is the removal of the indexation benefit, which previously allowed taxpayers to adjust the purchase price of assets like real estate and gold for inflation, thereby reducing taxable gains.

Let us understand with example:

So, talk of the town is that “Removal of the indexation benefit”

                First, understand the indexation.

“Indexation adjusts the purchase price for inflation, potentially reducing the taxable gain and overall tax liability”

(See the index chart at the end)

For instance, you bought a house in 2015 at cost 50lacs.

Now that we have applied the Government index formula, your house value has increased 254 base point to 363 base point as per the index chart. (See below)

Formula for indexation value is  

Cost Value * (multiply) C.Y. Index Base Points form chart / (divided) Purchased year Base Points from chart)

So, 50,00,000 *(multiply) 363 (2024-25 Base Point) / (divide) 254 (2015-16 Base Point)

= 71,45,669

In simpler terms, your 50 lacs have now become 71.45 lacs.

Now if you are selling this house at 80 Lacs than understand the effect of changes which are done in budget. Your capital gain with indexation will be Rs.  80 lacs–71.45 lacs = 8.55 Long term Capital gain.

Tax will be @ 20% with indexation on 8.55Lacs = 1.71 Lacs

Now we calculate the same without indexation.

Cost 50 Lacs Less Sales value 80 Lacs = 30 lacs long term Capital Gain

Tax will be @ 12.5% without indexation of 30 Lacs = 3.75 Lacs

So here you are paying more tax around 2lacs because of removal of indexation

Let us take another example same values but buying period will be 2021-22.

Here, your 50 lacs (317 Base Point) will become 57.25 lacs (363 Base Point).

Sold at the same price 80Lacs will result in

80 lacs – 57.25 lacs (with index benefit) = 22.75 Lac LTCG which will be taxed @ 20% which will come around 4.55 Lacs.

In the same way, without considering indexation, the LTCG of 30 Lac will be subject to a tax rate of 12.5%, resulting in approximately 3.75 Lacs of tax.

So here you are Saving more tax around 80 thousand because of removal of indexation

3. The government has increased the exemption limit for long-term capital gains on equity-related investments from ₹1 lakh to ₹1.25 lakh per year. This change should provide some relief to small investors.

“Pro Tip - So you must plan your capital gain in a such way that you can always book your LTG up to 1.25 without paying tax so in future your LTCG liability does not get triggered because of poor tax rather portfolio management.”

4. The revisions simplified the holding period to qualify for long-term capital gains. For listed securities, including shares and mutual fund units, the holding period is 12 months. For other assets like unlisted shares, real estate, and gold, the holding period is now 24 months.

5. Mutual funds that invest over 65% in debt instruments will now receive treatment as debt funds for taxation, aligning them with the tax treatment of other debt instruments. This change brings clarity and uniformity but may cause higher taxes for certain investors.

These are just some of the important changes which we discussed above. The role of your Tax consultant will play a crucial role here, as we always say that taxation is not a- DIY (do it yourself) Investing amid changing tax laws can undoubtedly be overwhelming, but with the right strategies and resources, you can position yourself for a maximum tax savings. The most important thing to remember is to take initiative; find the best ways to reduce your tax liability through a Legal Way!

Happy investing.

Cost Inflation Index Table from FY 2001-02 to FY 2024-25