How the Budget 2024 Transforms the Capital Gains!

While presenting the Union Budget 2024-2025 in Parliament, the Union Minister for Finance & Corporate Affairs, Smt. Nirmala Sitharaman emphasized the Budget’s focus on the nine identified priorities that expedite the journey towards the goal of Viksit Bharat. This year, due to the elections, Budget 2024 has been announced later than usual i.e. February 1.

She stated the priorities of the budget which were as follows:

• Productivity and Resilience in Agriculture
• Employment and Skilling
• Inclusive Human Resource Development and Social Justice
• Manufacturing and Services
• Urban Development
• Energy Security
• Infrastructure
• Innovation, Research and Development
• Next Generation Reforms.

There were also many reforms under Direct taxes and Indirect taxes in the Budget.

Highlights for Direct Tax Proposal (Related to Capital Gain Provisions) in Budget 2024:

1. Amendment in Section 46A:

Section 46A of the Income Tax Act, 1961 deals with the consideration received in respect of Buy back of Shares by the Company. In the Pre-budget scenario, the difference between the Cost of Acquisition and Value of Consideration received by the Shareholder was deemed to be the Capital Gains in the year of such Buyback.

Now, the Finance bill 2024 inserts a sub- clause (f) under Section 2(22) which covers “any payment by a company on purchase of its own shares from a shareholder….” i.e. now the amount of consideration received by a Shareholder from a Company towards buyback of Shares shall be treated as “Dividend”.

In the same lines, corresponding amendment is made in Section 46A of the Act, where it is provided that any consideration as referred u/s 2(22)(f) received from a company, i.e. in respect of Buyback of Shares, then for the purpose of section 46A, Value of Consideration shall be deemed to be NIL.

Therefore, there seems to be three implications of these amendments-

• Total sale consideration that is full value consideration is treated as dividend received by the shareholder, i.e. taxable under ‘other sources.’
• For the purpose of Capital Gains, Total sale consideration shall be deemed as Nil.
• And, the Cost of Acquisition of shares in buy-back is capital loss to be set off allowed against other capital gains.

So, the Tax Implications might be higher in the hands of Shareholder. However, the legal proposition seems to be interesting and is yet to be clarified after amendments.

Effective date of Amendment: 01.10.2024

2. Amendment in Section 47:

Section 47 deals with the certain transactions that are exempt from the meaning of ‘Transfer’- Now Section 47(iii) has been substituted with- “Any transfer of a capital asset by an individual or a Hindu undivided family, under a gift or will or an irrevocable trust”.

Now HUF is also included, meaning thereby any such transfer by HUF shall also be excluded from the term ‘Transfer’. Thus, gifts made by companies will be considered as ‘transfer’ only u/s 45, for the purpose of capital gains tax.

Effective date of Amendment: 01.04.2025

3. Amendment in Section 56(viiib)- Sunset Clause

With this proposal in budget, Indian Start-up ecosystem will be strengthened and relieved by the announcement of abolition of Angel Tax provision. With the sunset of Angel tax (i.e., section 56(2) (viib) of the Income-tax Act, 1961) which was introduced vide the Finance Act 2012, seeking to tax any excess premium received by a closely held company upon the issue of shares. These were introduced as an anti-abuse provision to prevent the generation and circulation of unaccounted money through share premiums received from resident investors in a private limited company in excess of its fair market value.
Afterwards, In Year 2016 the Government exempted startups registered with the Department of Industrial Policy and Promotion (‘DIPP’) from such angel tax and several rules were made regarding the Valuation methodology.

Now, Budget 2024 proposes to abolish the angel tax provisions for all categories of investors.

Effective date of Amendment: 01.04.2024, i.e. FY 2024-25

4. Amendment of section 111A

Section 111A of the Income Tax Act, 1961 was introduced in the Finance Act, 2004. It deals with the taxation of Short-term Capital Gains on Sale of listed Equity Shares, Units of Mutual funds and units of business trust.

Major Changes were made in Budget 2024:

• There will be only Two holding periods for the purpose of ascertaining Nature of Capital Gains i.e. Short-term or Long term which is 12 months and 24 months respectively while the 36 months holding period has been removed.
• The Tax Rate u/s 111A has been increased from 15% to 20%. Other financial and non-financial assets which are held for short term shall continue to attract the tax at slab rates.
• This aims for simplifying the Tax Structure and Easy Tax Computations.

Effective date of Amendment: For the Transactions where Transfer took place after 23^rd July, 2024.

5. Amendment of section 112A

Section 112A of the Income Tax Act, 1961 was introduced in the Finance Act, 2018. It deals with the taxation of Long-Term Capital Gains on Sale of listed Equity Shares, Units of Mutual funds and units of business trust.

Major Changes were made in Budget 2024:

• There will be only Two holding periods for the purpose of ascertaining Nature of Capital Gains i.e. Short-term or Long term which is 12 months and 24 months respectively while the 36 months holding period has been removed.
• The Tax Rate u/s 112A has been increased from 10% to 12.5%.
• The Limit of Exemption of Long-term capital gains has been increased from Rs. 1 Lacs to Rs.1.25 Lacs.
• This aims for simplifying the Tax Structure and Easy Tax Computations.

Effective date of Amendment: For the Transactions where Transfer took place after 23^rd July, 2024.

6. Other Points to Ponder:

• It is also proposed to increase the Security Transaction Tax (STT) on derivatives transactions, that is, Futures and Options. Tax on sale of futures in securities has been increased to 0.02% on contract value, from 0.0125%. In the case of options, where the tax is applied on the premium value and not contract value, STT on sale of options in securities has been increased to 0.1% on premium, from 0.0625%.

Effective date of Amendment: 01.10.2024

• Gains from Futures and Options- Classification of such income shall be Speculative Income Only, instead of Business Income.
• Similar Amendments for Tax Rate rationalization is made in following sections:
• Section 115AB: Tax on Income from units purchased in foreign currency or Capital Gains arising from their Transfer
• Section 115AC: Tax on Income from Bonds or Global depository receipts purchased in foreign currency or Capital Gains arising from their Transfer
• Section 115ACA: Tax on Income from Global depository receipts purchased in foreign currency or Capital Gains arising from their Transfer
• Section 115AD: Tax on Income of Foreign Institutional Investors from Securities or Capital Gains arising from their Transfer
• There is no change in Rollover benefits, meaning thereby, one can still claim the exemption from Capital Gains by virtue of Investments made as per Section 54 or 54F or 54EC and similar other specified sections.
• As per the recent amendment proposed in Budget proposals announced on 6^th Aug’ 2024, Taxpayers are being given now two options – either choose computation of tax on long-term capital gains at 12.5% rate without indexation or at 20% with indexation benefit on properties acquired on or before July 23, 2024.

7. Security-wise Tax Analysis of Pre and Post Budget Scenario:

Security	Pre-Budget			Post-Budget
	Holding Period	STCG Tax %	LTCG Tax %	Holding Period	STCG Tax %	LTCG Tax %
Listed Equity Shares	12 months	15%	10%	12 months	20%	12.5%
Un-Listed Equity Shares	24 months	Slab Rate	20% (with Indexation)	24 months	Slab Rate	12.5%
Real Estate Property	24 months	Slab Rate	20% (with Indexation)	24 months	Slab Rate	12.5%
Listed NCDs	12 months	Slab Rate	10%	12 months	Slab Rate	12.5%
Un-Listed NCDs	36 months	Slab Rate	20%	Deemed STCG	Slab Rate	NA
Gold/ Silver ETF	Deemed STCG	Slab Rate	NA	12 months	Slab Rate	12.5%
Physical Gold	36 months	Slab Rate	20% (with Indexation)	24 months	Slab Rate	12.5%

8. Amendment of section 112

Section 112 deals with the Taxation of all the Long-Term Capital Gains on Assets other than Assets specified under Section 112A of the Act such as-

• Listed Securities (Non STT Paid/ Except covered u/s 112A)
• Zero Coupon Bonds
• Unlisted Securities
• Immovable Property
• Other Long-Term Assets

With this Union Budget, Tax Rate for all the Long-Term Capital Gains has been rationalized to 12.5% without Indexation for all the class of Taxpayers while Previously, It was 20% with Indexation.

Effective date of Amendment: For the Transactions where Transfer took place after 23^rd July, 2024.

Understanding Impact of Long-Term Capital Gains Taxation in Pre and Post scenarios, i.e. Tax @ 20% (with Indexation) vis-à-vis Tax @12.5% (without Indexation):

Cases	Sale Amount	Sale Year	Purchase Cost	Purchase Year	Indexed Cost	Pre Budget		Post- Budget
						Capital Gains	Tax @20%	Capital Gains	Tax @12.5%
	A	B	C	D	E	F= A-E	G	H= A-C	I
Case 1	20,00,000	2024-25	5,00,000	2018-19	6,48,214	13,51,786	2,70,357	15,00,000	1,87,500
Case 2	30,00,000	2024-25	5,00,000	2010-11	10,86,826	19,13,174	3,82,635	25,00,000	3,12,500
Case 3	50,00,000	2024-25	5,00,000	2000-01	18,15,000	31,85,000	6,37,000	45,00,000	5,62,500
Case 4	50,00,000	2024-25	20,00,000	2000-01	72,60,000	-22,60,000	NA	30,00,000	3,75,000

So, the situation may differ in case-to-case basis on the basis of Period of Holding and quantum of Appreciation in Prices, However, In the Ideal scenario, where the Appreciation in Price of Property is more than Inflation rate, then the Post- budget Scenario will be more beneficial for the Taxpayers.

This is because the effect of Inflation is already accounted for in the Cost inflation Indexes and any appreciation over and above such Index, if taxed at lower rates as per new proposal, will be more beneficial.

On Wednesday 7^th August 2024, the Lok Sabha passed the Finance Bill 2024, which includes a major amendment to the long-term capital gains (LTCG) tax on real estate and others.

The Finance Bill 2024 received the assent of the President on August 16, 2024.

Let’s hope this Budget Transforms the Capital Gains in a positive way! Happy Learning!