LTCG Tax: Big news for taxpayers. Capital gains tax rules have undergone significant changes over the past decade. Previously, long-term capital gains were taxed at 20% with indexation. Capital gains tax rules changed with the introduction of Securities Transaction Tax (STT) in 2004. Shares of listed companies and equity mutual funds on which STT was paid were exempted from long-term capital gains (LTCG) tax.
LTCG reintroduction in 2018
LTCG tax was reintroduced in 2018 for shares of listed companies and equity mutual funds. LTCG above Rs 100,000 is taxed at 10% under Section 112A of the Income Tax Act. Gains earned up to January 31, 2018, are protected by grandfathering. The government made major changes to capital gains rules in the Union Budget 2024. The LTCG tax on shares of listed companies and equity mutual funds was increased from 10% to 12.5%. The LTC tax on unlisted shares was also reduced from 20% to 12.5%. However, the government eliminated the indexation benefit. The LTCG tax on immovable property was also reduced from 20% to 12.5%. The indexation benefit was also eliminated.
Nonetheless, the government has kept the option for indexation benefits on properties bought before July 23, 2024. The long-term capital gains (LTCG) tax for these properties remains at 20% with indexation. Additionally, a new tax rate of 12.5% without indexation has been introduced. The aim of the government is to streamline the capital gains tax regulations. There has been a persistent call for a unified rate rather than multiple capital gains tax rates.
At present, various assets have distinct holding periods for capital gains tax. The government might take measures to harmonize this discrepancy in the upcoming Union Budget. Long-term capital gains apply to shares of listed companies held for over 12 months, while for unlisted companies, this duration is 24 months. Removing this differentiation would greatly alleviate the burden on taxpayers.
There is no requirement to maintain Securities Transaction Tax
The government established STT as a substitute for the LTCG tax on stocks. With the reintroduction of LTCG in 2018, the necessity for STT has diminished. Reducing or gradually phasing out STT could enhance liquidity in the stock markets. Presently, investors must pay both STT and LTCG taxes.
Different regulations for debt funds and equity funds
At this time, the tax regulations for equity mutual fund schemes are quite favorable. The holding period for LTCG is set at 12 months, and LTCG up to Rs 1.25 lakh is exempt from tax. In contrast, debt funds are taxed based on the applicable tax slab, irrespective of the duration after which they are sold. This indicates that the LTCG benefit for debt funds has been removed. This inconsistency in tax regulations needs to be rectified.