Capital Gains Tax in India: Types, Rates, Calculation Methods, Exemptions, and Ways to Save Tax
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Capital gains tax is a levy on the profit realized from the sale of non-inventory assets, such as stocks, bonds, real estate, and other investments. In India, the Union Budget 2024 introduced significant changes to the capital gains tax framework, aiming to simplify the tax structure and promote long-term investments.
Key Changes Introduced in Budget 2024:
Uniform Long-Term Capital Gains (LTCG) Tax Rate:
A standardised LTCG tax rate of 12.5% has been established across all asset classes, replacing the previous varied rates.
Adjustment in Short-Term Capital Gains (STCG) Tax Rate:
The STCG tax rate on equity-related investments has been increased from 15% to 20%.
Modification of Holding Periods:
The holding period to qualify for LTCG has been standardised:
- Listed securities: 12 months
- All other assets: 24 months
Removal of Indexation Benefits:
The indexation benefit, which adjusted the purchase price of assets for inflation to reduce taxable gains, has been removed for real estate and other assets.
Increased Exemption Limit for LTCG:
The exemption limit for LTCG on equity-related investments has been raised from ₹1 lakh to ₹1.25 lakh.
1. What is Capital Gains Tax?
Capital gains tax is imposed on the profit earned from the sale of capital assets such as property, stocks, bonds, or mutual funds. The gain is calculated as the difference between the sale price and the purchase price of the asset. These gains are categorized based on the holding period of the asset:
2. Types of Capital Gains
Short-Term Capital Gains (STCG)
STCG arises when assets are sold within a specified short holding period:
- Listed Equity Shares and Equity-Oriented Mutual Funds: Held for less than 12 months.
- Other Assets (e.g., real estate, unlisted shares): Held for less than 24 months.
Long-Term Capital Gains (LTCG)
LTCG applies when assets are held beyond the short-term holding period:
- Listed Equity Shares and Equity-Oriented Mutual Funds: Held for more than 12 months.
- Other Assets: Held for more than 24 months.
3. Capital Gains Tax Rates (Post-Budget 2024)
The Union Budget 2024 introduced the following changes to capital gains tax rates:
Short-Term Capital Gains (STCG):
- Listed Equity Shares and Equity-Oriented Mutual Funds: Taxed at 20% (increased from 15%).
- Other Assets: Taxed at applicable slab rates or 30%, depending on the asset type.
Long-Term Capital Gains (LTCG):
- All Assets: Taxed at a uniform rate of 12.5%, replacing the previous varied rates.
Note: Previously, LTCG calculations allowed for indexation benefits to adjust the purchase price for inflation. However, the Budget 2024 has removed indexation benefits for most assets.
5. Exemptions on Capital Gains
Certain exemptions are available under the Income Tax Act to reduce capital gains tax liability:
- Section 54: Exemption on LTCG from the sale of a residential property if the proceeds are reinvested in another residential property.
- Section 54F: Exemption on LTCG from the sale of any asset other than a residential property if the net consideration is invested in a residential property.
- Section 54EC: Exemption on LTCG if the gains are invested in specified bonds within six months of the sale.
It’s important to note that while these exemptions continue, the removal of indexation benefits may affect the overall tax liability.
6. Strategies to Save Tax on Capital Gains
- Invest in Capital Gains Bonds: Utilize Section 54EC by investing in specified bonds to claim exemption.
- Reinvest in Residential Property: Under Sections 54 and 54F, reinvesting the proceeds can provide tax relief.
- Timing the Sale: Holding assets beyond the specified period to qualify for LTCG can result in lower tax rates.
- Set Off Capital Losses: Adjust capital losses against capital gains to reduce taxable income.
Utilize Exemption Limits: For LTCG on equity shares and mutual funds, the first ₹1.25 lakh of gains are exempt from tax.
