Union Budget 2024: New Tax Structures for Long-Term and Short-Term Capital Gains

The Union Budget 2024, presented by Finance Minister Nirmala Sitharaman, has introduced significant changes to the taxation of long-term capital gains (LTCG) and short-term capital gains (STCG). The LTCG tax rate has been increased from 10% to 12.5% on all financial and non-financial assets. Alongside this, the STCG tax rate on certain financial assets has also seen an increase to 20% from the previous 15%.

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One of the key highlights of this budget is the increase in the exemption limit for long-term capital gains tax. The exemption threshold has been raised from Rs 1 lakh to Rs 1.25 lakh. This adjustment is significant as it allows taxpayers to save more on capital gains taxes, even with the slight increase in the LTCG tax rate.

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Divya Baweja, a Partner at Deloitte India, explained the impact of these changes. Under the prior system, a gain of Rs 2,00,000 would result in a tax of Rs 10,400, including a 4% cess. With the new measures, the tax on the same gain of Rs 2,00,000 would now only be Rs 9,375. This change translates to a savings of Rs 650 for taxpayers, suggesting that some individuals could still see a tax reduction despite the rate hike.

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CA (Dr.) Suresh Surana echoed Baweja’s insights, noting that the LTCG tax was raised to 12.5% while simultaneously enhancing the exemption limit. For taxpayers with long-term gains of Rs 2,00,000, this would mean a reduction in their tax amount due to the increased exemption threshold.

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The announcement has been received with mixed feelings. While there is a new tax rate in place, the increased exemption limit is aimed at benefiting individuals who hold onto their investments for over a year. This implies that investors will have the opportunity to retain more of their profits before taxes apply.

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Krishan Mishra, CEO of FPSB India, expressed concerns regarding the increased LTCG and STCG tax rates but acknowledged the importance of holding investments for the long term. He believes that the government’s focus on encouraging long-term investments is a step in the right direction, even if the higher rates pose a minor setback.

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The finance minister also highlighted the classification of assets based on their holding periods. Listed financial assets held for more than a year will be classified as long-term. On the other hand, unlisted financial assets will join the long-term framework if held for more than two years. This policy aims to provide clearer guidelines for investors regarding the taxation of their financial assets.

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With regard to taxation on capital gains derived from various kinds of assets, the budget adjustments signal a notable shift. While the market initially reacted cautiously, experts predict the long-term benefits may outweigh the immediate fears. Vaibhav Porwal, co-founder of Dezerv, suggested that while the market’s reaction may be negative at first, these changes could ultimately foster a more stable investment environment.

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He also emphasized the growing disparity between STCG and LTCG rates, which serves as an incentive for investors to adopt a longer-term approach. By aligning tax structures across diverse asset classes, the government is also potentially simplifying the decision-making process for investors.

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The response from the stock market to these changes was immediate, with significant drops noted in various indices. The BSE Sensex, for example, slumped by 1,278 points during intraday trading, hitting a low of 79,224. The Nifty50 also saw a considerable decline, reaching a low of 24,074.

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Additionally, the mid-cap and small-cap indices experienced drops of up to 3.96% during the same trading sessions. Market participants were quick to react to the newfound tax obligations and the adjustments in the securities transaction tax (STT) that have been put in place as part of this budget.

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Sitharaman also announced changes to the securities transaction tax on futures and options, proposing to raise the STT for these products to 0.02% and 0.01%. The government is aiming to curb excessive speculation in the derivatives market, an area that has attracted scrutiny from the Securities and Exchange Board of India.

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Commenting on the budget proposals, Sunil Damania, Chief Investment Officer at MojoPMS, pointed out that while the increased STT on derivatives may seem burdensome now, it represents a positive step toward managing speculation in the futures and options market.

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This budget marks Nirmala Sitharaman’s seventh presentation, leading the Modi government as it seeks to refine taxation and create a more stable market environment for investors. With these new changes, individuals will have to adjust their investment strategies to align with the revised tax landscape, keeping in mind both the short-term and long-term investment benefits.

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