Introduction:

Capital gains are profits or gains derived from the transfer or sale of a capital asset. A capital asset refers to any property held by an individual, regardless of its connection to their business or profession, and includes both tangible assets, like real estate and machinery, and intangible assets, such as shares, securities, bonds, and debentures. Capital gains tax is levied on individuals and businesses that engage in the transfer of these assets.

The calculation of capital gain is based on the difference between the sale consideration of a property and the cost incurred for its acquisition or improvement. There are two types of capital gains, Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG), each subject to different tax rates and regulatory requirements. This distinction between STCG and LTCG is essential, as it determines how the gains will be taxed.

Budget 2024 Changes to taxation on Income From Capital Gains: Rates of Tax on Capital Gains:

Tax Rates for LTCG as well as STCG. According to the updates in Budget 2024, with effect from 23rd July 2024 tax on long term and short term Capital Gains are to be taxed as follows:

Equity Shares & Mutual Funds:

• Short-Term Capital Gains: The tax rate under Section 111A for listed equity shares, equity-oriented mutual funds, and business trusts has increased from 15% to 20% when securities transaction tax (STT) is paid.
• Long-Term Capital Gains: For the same asset classes, the long-term capital gains (LTCG) tax rate under Section 112A has increased from 10% to 12.5%.
• Exemption Limit: The exemption threshold for LTCG on equity shares and equity-oriented mutual funds has been raised from INR 100,000 to INR 125,000.

Immovable Property (Land and Buildings):

• LTCG for Property Sold After July 23, 2024:
• If indexation benefits are not availed, the tax rate is 12.5%.
• If indexation benefits are availed, the tax rate remains at 20%.
• Flexibility for Pre-July 23, 2024 Acquisitions: Taxpayers have the choice to apply the 12.5% rate without indexation or to use the 20% rate with indexation, choosing the option that minimizes their tax liability.

Indexation Impact:

• Indexation Adjustments: Indexation provides relief from inflation impact by adjusting the asset’s cost base. Without indexation, the original purchase price is used, potentially increasing the taxable gain, especially relevant for properties purchased post-July 23, 2024.

Simplified Holding Period for Capital Gains Tax:

The Holding period requirements for capital assets have been streamlined. Now, there are only two holding periods to determine whether an asset is a long-term capital asset: 1 year and 2 years.

Previously, there were three different holding periods for classifying an asset as a long-term capital asset. With the new rules:

• For listed securities, including units of business trusts (such as REITs and InvITs ), the holding period is now reduced to 1 year, down from 36 months.
• For assets like gold and unlisted securities (excluding unlisted shares), the holding period is now reduced from 36 months to 24 months.
• The holding period for immovable property and unlisted shares remains unchanged at 24 months.

This simplification reduces the complexity in determining capital gains tax eligibility across different types of assets.

TDS Applicability in Capital Gains:

TDS (Tax Deducted at Source) generally applies in capital gains scenarios when a property is sold or when capital gains transactions involve Non-Resident Indians (NRIs).

• For Property Sales: When a property is sold, the buyer is required to deduct TDS at 1% of the sale consideration if the sale amount exceeds INR.50 Lakhs.
• For NRIs: Long-term capital gains earned by NRIs are subject to a TDS of 20%.

These TDS rules help ensure tax compliance in high-value property transactions and capital gains involving NRIs.

Conclusion:

Income from capital gains will now be taxed at a uniform rate for most asset classes. Certain long-term capital assets will still enjoy the indexation benefit for transactions made after July 23, 2024. The changes have streamlined the holding periods for assets, reducing them to just two categories. Overall, these important modifications to capital taxation are expected to benefit taxpayers in most cases