New Capital Gains Tax Laws in 2024 – How They Affect You

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The Final Union Budget 2024-25 has ushered in pivotal changes to the taxation of capital gains through the Finance (No.2) Bill, 2024. Let’s delve into these key modifications and their implications for both taxpayers and investors.

Major Changes in Capital Gains Taxation

The new capital gains tax regime in the Final Union Budget 2024-25

The Finance (No.2) Bill, 2024, introduces a rationalized and simplified structure for taxing capital gains. Here are the five primary facets of this overhaul:

Simplified Holding Periods: The holding periods have been streamlined. Now, there are only two holding periods: one year and two years.
Uniform Rates: Tax rates have been rationalized and made uniform for the majority of assets.
Elimination of Indexation: Indexation has been removed to simplify computation, paired with a tax rate reduction from 20% to 12.5%.
Parity Between Residents and Non-Residents: The new regime ensures parity between resident and non-resident taxpayers.
Unchanged Rollover Benefits: The rollover benefits remain the same.

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Effective Date of New Provisions on Capital Gains

The new provisions for taxing capital gains take effect on July 23, 2024, applying to any asset transfers made on or after this date.

Simplified Holding Periods

Previously, there were three holding periods to classify an asset as a long-term capital asset. Now, the holding periods have been simplified to just two:

For listed securities, the holding period is now one year.
For all other assets, the holding period is two years.

Beneficiaries of the Holding Period Change

Various investors will benefit from the new holding period structure:

For listed units of business trusts (ReITs, InVITs), the holding period is reduced from 36 months to 12 months.
The holding period for gold and unlisted securities (excluding unlisted shares) is reduced from 36 months to 24 months.

Holding Period for Immovable Property and Unlisted Shares

The holding period for immovable property and unlisted shares remains unchanged at 24 months.

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Changes in Rate Structure for STT Paid Capital Assets

The rate for short-term STT-paid listed equity, equity-oriented mutual funds, and units of business trusts (Section 111A) has increased from 15% to 20%. Similarly, the long-term rate (Section 112A) for these assets has risen from 10% to 12.5%.

Exemption Limit for Long-Term Capital Gains under Section 112A

The exemption limit for long-term capital gains (LTCG) under Section 112A has increased from ₹1 lakh to ₹1.25 lakh. This change applies from FY 2024-25 onwards, offering additional relief to small investors.

Changes in Rate Structure for Other Long-Term Capital Gains

The rate for other long-term capital gains on all assets has been standardized to 12.5% without indexation (Section 112). Previously, this rate was 20% with indexation. This adjustment simplifies the taxation process and makes it easier for taxpayers to compute their liabilities.

Beneficiaries of the Rate Change from 20% (with Indexation) to 12.5% (without Indexation)

Most asset categories will benefit from the reduced tax rate. While the majority of taxpayers will see substantial benefits, those with gains closely aligned with inflation may see limited or no benefits.

Continuation of Rollover Benefits

Taxpayers can continue to avail themselves of rollover benefits on capital gains. The existing rollover benefits under the Income Tax Act remain unchanged. Taxpayers can still save on LTCG tax by reinvesting gains into specified assets, provided they meet the applicable conditions.

Eligible Assets for Rollover Benefits

Taxpayers can invest their long-term capital gains in specific assets to avail of rollover benefits, including:

Residential properties under Section 54 or Section 54F.
Certain bonds under Section 54EC.

For complete details, refer to Sections 54, 54B, 54D, 54EC, 54F, and 54G of the Income Tax Act.

Amount Eligible for Rollover Benefit

Investment in 54EC bonds is capped at ₹50 lakh. For other cases, the capital gain is exempt from tax, subject to specified conditions.

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Rationale for Changes

The rationale behind these changes is to simplify the tax structure, making compliance easier in terms of computation, filing, and record maintenance. The streamlined approach also eliminates differential rates for various classes of assets, promoting fairness and transparency in the tax system. These changes are expected to provide relief to investors, encourage investment, and support economic growth by creating a more equitable and straightforward tax regime.

Final Thoughts on the Changes

The new capital gains tax regime in the Final Union Budget 2024-25 represents a significant step towards a more streamlined and investor-friendly tax system. By simplifying the holding periods, rationalizing tax rates, eliminating indexation, and maintaining rollover benefits, the government has addressed key concerns of taxpayers and investors alike. These changes are poised to make the Indian market more attractive and accessible, driving economic growth and stability in the years to come.

In conclusion, the changes introduced in the Final Union Budget 2024-25 are designed to create a simpler, more transparent, and equitable tax system. By reducing complexity, increasing parity, and standardizing tax rates, the government aims to enhance compliance and foster a positive investment climate, ultimately contributing to long-term economic growth.