Arjuna (Fictional Character): Krishna, The Hon’ble Finance Minister has recently presented the budget for 2024, which has brought about many proposals of changes in the taxation laws, especially concerning capital gains. There is a lot of buzz and many questions among taxpayers regarding these changes. Could you elaborate on the significant changes made to the taxation of capital gains?
Krishna (Fictional Character): Arjuna, The Finance Bill 2024 has introduced several important changes in the capital gains tax regime aimed at simplifying the tax structure, ensuring fairness, and promoting investment. Some of the changes are meant for simplifying the taxation system but it is coming at cost of higher taxation for taxpayers.
Arjuna (Fictional Character): Krishna, what are those 5 important changes?
Krishna (Fictional Character): Arjuna, here are the 5 most important changes in this budget-
1. Increase in Exemption limit for Long-Term Capital Gains (LTCG) The exemption limit for long-term capital gains on equity shares, units of equity-oriented funds, and business trusts is proposed to be increased from ₹1 lakh to ₹1.25 lakh.
Example: If an investor sells shares and makes a long-term capital gain of ₹1.5 lakh, previously, ₹1 lakh was exempt, and the remaining ₹50,000 was taxed. Now, ₹1.25 lakh is exempt, and only ₹25,000 will be taxed.
Effect: This increase in exemption limit will reduce the tax burden on small investors and encourage long-term investments.
2. Removal of Indexation Benefit on Long Term Capital Gain.
The indexation benefit for calculating long-term capital gains on property, gold, and other unlisted assets is proposed to be removed for assets transferred on or after 23rd July 2024.
Example: If an investor sells property after 23rd July 2024 which he bought for ₹50 lakh (indexed to ₹70 lakh) at ₹1 crore, the long-term capital gain without indexation is ₹50 lakh. Previously before 23rd July 2024, with indexation, the gain would be ₹30 lakh, resulting in a lower tax liability. Now, the entire ₹50 lakh gain will be taxed.
Effect: This will simplify the computation of capital gains for taxpayers and tax administration, though it might increase the tax liability for those holding such assets.
3. Reduction of Long Term Capital Gain Tax Rate
Long Term Capital gains tax is proposed to reduce from 20% to 12.5%. This change has been brought in to simply the taxation system and tax all asset classes under the same rate.
Example: For sale of land before 23rd July 2023 the tax rate was 20%, suppose if gains (with Indexation) from Sale of Land was Rs 20 Lakhs then Rs 4 lakhs tax was required to paid but now suppose gain (without Indexation) after 23rd July 2023 is Rs 30 Lakhs then as per the new tax rate of 12.5% only Rs 3.75 Lakhs tax is to be paid as per the new tax rate.
Effect: This change ensures uniformity in the taxation of Immovable Property, unlisted bonds and debentures, simplifying the tax structure and bringing clarity.
4. Uniformity in Holding Period for Capital Assets
The holding period for capital assets to qualify as long-term has been standardized. Listed equity shares must be held for over one year, while unlisted financial and all other non-financial assets must be held for over two years.
Example: If an investor holds listed equity shares for over a year, the gains are classified as long-term. For unlisted shares, they must be held for over two years to qualify as long-term. Earlier there were different holding periods for different classes of assets, which has been now standardized.
Effect: This uniformity simplifies the classification of capital assets and ensures consistent taxation treatment.
5. Increase in Tax Rate for Short Term Capital gain on Listed Shares.
The tax rate for short-term capital gains on certain financial assets is proposed to be increased.
Example: If an investor sells shares within a year and makes a short-term capital gain of ₹1 lakh, the tax rate has been increased from 15% to 20%, resulting in a higher tax payable from ₹15,000 to ₹20,000.
Effect: This increase aims to discourage short-term trading and promote long-term investments, aligning with the government’s vision of financial stability and growth.
Arjuna (Fictional Character): Krishna, these changes seem quite significant. From when will these changes be applicable?
Krishna (Fictional Character): Arjuna, these changes are proposed to be applicable from July 23, 2024. Taxpayers need to properly calculate their taxes for transactions taking place before and after 23rd July 2024.
Arjuna (Fictional Character): Krishna, what is the key takeaway from these changes?
Krishna (Fictional Character): Arjuna, the key takeaway is that the government aims to simplify and rationalize the capital gains tax regime while ensuring fairness and promoting investment. Taxpayers should stay updated with these changes and adjust their financial planning accordingly to maximize their benefits and contribute to the nation’s economic growth.
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