Capital Gains Tax Overhaul: What the 2024-25 Budget Means for Investors

The Union Budget 2024-25 has introduced significant changes to the capital gains tax framework. Some measures may be challenging, while others provide benefits. Here’s a concise analysis of what these changes mean for you.

LTCG: Long Term Capital Gains
STCG: Short Term Capital Gains

Key Changes

1. LTCG amendment to initial Elimination of Indexation benefit for property

On Budget Day

• • Exception: Assets bought before 1 April 2001 still benefit from indexation.
  • For assets acquired after 2001, LTCG Tax Rate Reduced from 20% with indexation to 12.5% without any indexation.
  • Impact: Full gains taxed without indexation, affecting property capital gains.

Proposed Amendment

• • For assets acquired till 23^rd July 2024, taxpayers are allowed to choose between LTCG tax rate

1. 1. 1. at 20% with indexation (old scheme) and
      2. at 12.5% rate without indexation (new scheme).

2. Increased Tax on Equities
   • Short-term Gains: Tax rate increased from 15% to 20%.
   • Long-term Gains: Tax rate increased from 10% to 12.5%.
   • Exemption Limit: Raised from Rs. 1 lakh to Rs. 1.25 lakh per financial year.
   • Increase of Securities Transaction Tax: on Futures trading to 0.02% & options trading to 0.1%.

3. Removal of Indexation for Debt Funds

• • Previous Regime: Before April 2023, LTCG was taxed at 20% with indexation after 3 years and STCG at slab rate.
  • New Regime: For Investment prior to 1^st April 2023, & redemption on or after 23^rd July 2024, LTCG rate is 12.5% after 24 months, STCG at slab rate.

Tax Liability of Real Estate Investments

According to the RBI, real estate returns range from 1-9% per annum. Research reports, like those from Knight Frank, indicate an average increase of 6-7% per annum over the last decade.

For investors who choose to opt for 12.5% tax rate, the tax liability increases exponentially if the real estate return per annum is lower than inflation at ~6%. But the liability is significantly high at 18% even if properties appreciate by 9% pa. Investors should wisely choose the taxation regime which is the lower of two.

 
Tax Liability of Debt Investments

Debt Investments:

Average increase in tax liability (without indexation benefit and a flat 12.5% LTCG rate) for debt funds acquired since 2010 is shown below:

With most debt funds averaging returns of 7-7.5% over the last decade, tax liability is bound to increase ~50% on average for investors.

Tax Liability of Equity Investments

Equity Investments:

• Grandfathering maintained for equity purchased before 31st January 2018.
• Even with an increased exemption limit of Rs. 1.25 lacs, average increase in tax liability considering 12.5% tax rate is around 18% (Nifty 500 returns since 2018 at an average of 14.57% considered)
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Clearly, an increase in exemption limit does not seem to have reduced the burden on investors even with a CAGR of over 14%.

Conclusion: The changes in the capital gains tax framework in the Union Budget 2024-25 will likely increase the tax burden for many investors. While higher exemption limits provide some relief, removal of indexation and increased taxes on gains could significantly impact investors’ net returns.