Tax Rate on Long Term Capital Gains on Listed Securities Increased To 12.5%

Summary: As per the Finance Act 2024, the long-term capital gains (LTCG) tax on listed securities has been raised from 10% to 12.5% for transactions carried out from the assessment year 2024-25. This change applies to securities like listed shares and equity-oriented mutual funds. For the assessment year 2024-25, the exemption limit for LTCG on listed securities has increased from ₹1,00,000 to ₹1,25,000. Any transactions made before July 23, 2024, will still be subject to the previous 10% tax rate. Additionally, section 50AA, effective from the assessment year 2024-25, introduces new provisions for calculating capital gains on Market Linked Debentures (MLDs) and Specified Mutual Funds, such as removing the benefit of indexation and lowering the tax rate on these investments to 12.5%. The definition of Specified Mutual Funds has also been updated, now excluding Exchange Traded Funds (ETFs), Fund of Funds (FOFs), and Gold Funds. These will now be taxed as long-term capital gains instead of deemed short-term capital gains. From the assessment year 2026-27, the definition will further change, with more specific criteria regarding the percentage of investment in debt or money market securities. These updates reflect a broader tax restructuring that aims to simplify tax calculations and encourage compliance while impacting mutual funds and debentures that were previously subject to different tax treatments.

Special provision for computation of capital gains in case of Market Linked Debenture.

From assessment year 2024-25 on words, section 50AA provides that notwithstanding anything contained in section 2(42A) or section 48 of Income Tax Act, where the capital asset is a unit of Specified Mutual Fund acquired on or after 1^st April, 2023, or a Market Linked Debenture, the full value of consideration received or accruing as a result of transfer or redemption or maturity, of such debenture or unit as reduced by;

01. cost of acquisition of the debenture or unit; and

02. the expenditure incurred wholly and exclusively in connection with such transfer or redemption or maturity.

In short, from assessment year 2024-25, capital gains arise from transfer of units of Market Linked Debentures and Specified Mutual Funds, on long term capital gains under section 112 rate of long term capital gains has been reduced from 20% to 12.5% and benefit of indexation will not available. Definition of Specified Mutual Fund is amended accordingly ETF, FOF, and Gold Funds are not covered under section 50AA. Accordingly out of total investment of Mutual Fund, if 35% is invested in equity shares of Domestic Company, it will considered as Specified Mutual Fund. The effect of this will be on Debt Funds, Exchange Traded Funds (ETF). Gold Funds and Fund of Funds (FOF).

Now Exchange Traded Funds, Fund of Funds and Gold Funds are not considered as Special Mutual Funds and capital gain from these funds are to be considered as Long Term Capital gains, instead of Deemed Short Term Capital Gains, accordingly from assessment year 2026-27, section 50AA definition of Specified Mutual Fund amended as under:

• In Mutual Fund, investment of Debt/Money Market Investment is more than 65% are considered as Specified Mutual Funds.
• Investment of any funds is invested in Debt/Money Market investment is also considered as Specified Mutual Fund.

From 23^rd July, 2024, under section 112A of the Act, Long Term Capital Gain on Listed Securities is increased from 10% to 12.5%.

Long term capital gains on listed shares as well as Securities, which includes units of Equity Oriented Mutual Funds were exempt under section 10(38) up to assessment year 2018-19. From assessment year 2019-20, tax was levied at flat rate of 10%.

Under Finance Act, 2024(2), under section 112A, rate of long term capital gains on listed securities has increased from 10% to 12.5%. Please remember that any transection made up to 22^rd July, 2024 will liable at the rate of 10% on long term capital gains.

Long Term Capital Gains on listed securities are exempt up to Rs. 1,25,000 which was up to Rs. 1,00,000 available up to assessment year 2023-24. This limit is Increase from Rs.1,00,00 to Rs. 1,25,000 by Finance Act, 2024(2).

Example:

Mr. A, aged 50 years, being resident, has total income during assessment year 2024-25 was Rs.6,50,000 which include Rs.1,50,000 long term capital gains in respect of listed equity shares sold on 18^th January, 2024, on which securities transaction tax is paid on acquisition  on 15^th January, 2023 and on sale of such capital asset, the tax payable is as under:

Total Income inclusive of Long Term Capital

If it is for assessment year 2025-26 deduction of Rs. 1,25,000 available instead of Rs.1,00,000 and tax on capital gain will be 12.5% instead of 10%.