The widening gap between STCG and LTCG rates is a clear incentive for longer-term holding of equity investments
In Budget 2024-25, Union Minister of Finance Nirmala Sitharaman made some key announcements regarding capital gains tax, namely increasing the short-term capital gains (STCG) tax on specified financial assets from 15 per cent to 20 per cent and also increasing the long-term capital gains (LTCG) tax from 10 per cent to 12.5 per cent.
She said: “Short-term gains on specified financial assets shall henceforth attract a tax rate of 20 per cent as compared to 15 per cent, while that on all other financial assets and non-financial assets shall continue to attract the applicable tax rate. On the other hand, long-term gains on all financial and non-financial assets will attract a tax rate of 12.5 per cent. For the benefit of the lower and middle-income classes, it is proposed to increase the limit of exemption of capital gains on certain listed financial assets from Rs 1 lakh to Rs 1.25 lakh per year.”
Previously, long-term capital gains (LTCG) was taxed at 10 per cent.
Sitharaman also clarified that listed financial assets held for more than a year will be classified as long-term, while unlisted financial assets and all non-financial assets will have to be held for at least two years to be classified as long-term.
Unlisted bonds and debentures, debt mutual funds, and market-linked debentures, irrespective of the holding period, however, will attract tax on capital gains at applicable rates.
These proposals are proposed to be given effect with immediate force.
Rationalisation And Simplification Of Taxation Of Capital Gains
According to experts, the change will increase the tax outlay for equity investors.
“For listed equity share and equity-oriented mutual funds, tax rate has been increased from 10 per cent to 12.5 per cent. However, exemption limit has been raised from 1 lakh to 1.25 lakh. Other long-term capital assets, such as gold, property, which were taxed at 20 per cent with indexation, the tax rate has been reduced to 12.5 per cent, but indexation benefit has been removed. There will be only two holding periods of 1 year and 2 years for different class of assets, as against three holding periods i.e. 1, 2 and 3 years. So far as short term capital gain for STT paid equity shares and equity-oriented mutual funds is concerned, tax rate has been increased from 15 per cent to 20 per cent,” says Poorva Prakash, partner, Deloitte India.
“These changes will increase the tax outlay for equity investors,” he says.
Impact On Market
According to experts, there could be short-term market volatility following the recent tax rate changes, as such adjustments are likely to affect investor sentiment.
“In her speech, the finance minister announced that LTCG on all financial and non-financial assets will now be taxed at 12.5 per cent. These changes are likely to impact investor behaviour and market dynamics,” says Adhil Shetty, CEO, BankBazaar, a fintech portal.
The increase in LTCG tax could also prompt some investors to reassess their investment strategies, particularly in assets that were previously more tax-efficient. “Overall, while these measures aim to boost government revenues, they could introduce a period of adjustment and uncertainty in the markets,” says Shetty.
Says Vaibhav Porwal, co-founder, Dezerv, a wealth management firm: “While the market’s initial reaction may seem bearish, we believe these changes will ultimately foster a more stable and mature investment environment. The widening gap between STCG and LTCG rates is a clear incentive for longer-term holdings. This move is also a step towards standardising taxation across various asset classes, potentially simplifying the investment decision-making process for many.”
The market is currently responding with a short-term perspective, particularly concerning the securities transaction tax (STT) adjustments in derivatives. This will undoubtedly impact the profitability of frequent traders.
“However, we encourage investors to look beyond immediate market reactions and consider the long-term benefits of a tax structure that promotes patient capital,” says Porwal.