The Union Budget 2024-25 has introduced some significant changes to the taxation of capital gains, affecting both long-term and short-term gains across various asset classes. Whether you’re investing in equities, mutual funds, real estate, or other capital assets, it’s essential to stay informed about these updates to plan your investments and tax liabilities effectively.

In this article, we’ll discuss the latest changes applicable to Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG) for the financial year 2024-25, along with easy-to-understand examples to help you navigate the revised tax landscape.

What are Capital Gains? A Quick Refresher

When you sell a capital asset for a price higher than its purchase price, the profit earned is termed as a capital gain. The tax treatment of this gain depends on how long the asset was held before selling:

• Short-Term Capital Gain (STCG): Gain from selling a capital asset within a specified short holding period.
• Long-Term Capital Gain (LTCG): Gain from selling a capital asset held for a longer period.

The classification of an asset as short-term or long-term depends on the type of asset and the period of holding.

Key Changes in Capital Gains Taxation for FY 2024-25

1.Increase in Exemption Limit for LTCG on Equity and Equity-Oriented Mutual Funds:

Earlier Provision:
Long-Term Capital Gains on the sale of listed equity shares and equity mutual funds above ₹1 lakh in a financial year were taxed at 10% without the benefit of indexation.

New Provision:
The tax-free exemption limit has now been increased from ₹1 lakh to ₹1.25 lakh per financial year.

Example:
If Mr. Ramesh earns ₹1.50 lakh as LTCG from equity mutual funds in FY 2024-25:
– Taxable LTCG = ₹1.50 lakh – ₹1.25 lakh = ₹25,000
– Tax payable = 10% of ₹25,000 = ₹2,500 (plus applicable surcharge and cess)

Impact:
This move provides relief to small investors by increasing the tax-free limit on long-term gains from equities and equity-oriented funds.

2.Revised Holding Periods for Long-Term Capital Assets:

Effective from July 23, 2024, the holding period criteria to classify assets as long-term have been streamlined.

• Listed Securities (e.g., equity shares, equity-oriented mutual funds): Assets held for more than 12 months are considered long-term.​
• All Other Assets (including land and buildings): Assets held for more than 24 months are deemed long-term.

3.Changes in Tax Rates and Indexation Benefits:

The Finance Bill 2024 introduced significant amendments to the taxation of long-term capital gains (LTCG) on land and building:

• For Properties Acquired Before July 23, 2024:
  • Taxpayers have the option to choose between:
    • 20% tax rate with indexation benefit, or
    • 12.5% tax rate without indexation.

This flexibility allows taxpayers to select the method that results in a lower tax liability

• For Properties Acquired On or After July 23, 2024:
  • A flat 12.5% tax rate without indexation applies.

The indexation benefit is not available for these properties.

Practical Example: Tax Computation:

Scenario: Mr. Sharma purchased a residential property in June 2015 for ₹30 lakh and sold it in August 2024 for ₹80 lakh.​

• Option 1: 20% Tax with Indexation
  • Assuming the indexed cost of acquisition is ₹45 lakh:
  • Capital Gain = ₹80 lakh – ₹45 lakh = ₹35 lakh
  • Tax Liability = 20% of ₹35 lakh = ₹7 lakh​
• Option 2: 12.5% Tax without Indexation
  • Capital Gain = ₹80 lakh – ₹30 lakh = ₹50 lakh
  • Tax Liability = 12.5% of ₹50 lakh = ₹6.25 lakh​

Conclusion: In this case, opting for the 12.5% tax rate without indexation results in a lower tax liability.​

Conclusion:

The recent amendments to capital gains tax provisions reflect the government’s continuing effort to simplify the tax regime and minimize arbitrage opportunities between asset classes.

Investors, especially those with diversified portfolios in equities, mutual funds, real estate, and unlisted shares, should carefully review these changes while planning their investments and tax liabilities for FY 2024-25.