Capital Gains Tax

The Union Budget 2024 introduced significant changes to the capital gains tax structure, impacting both individual taxpayers and businesses. Capital gains tax is levied on the profit earned from the sale of capital assets, such as real estate, stocks and bonds. 

The new budget has brought about critical changes, particularly in the rates and exemptions associated with capital gains. This blog delves into the key updates and their implications for taxpayers.

Overview of Capital Gains Tax

There are two types of capital gains taxation:

• Short-Term Capital Gains (STCG):

These are gains from the sale of assets which you hold for a short period, typically less than 24 months for real estate and less than 12 months for stocks and securities.

• Long-Term Capital Gains (LTCG):

These are gains from the sale of assets if you hold these for longer periods. For most assets, the holding period is more than 24 months, but for stocks and securities, it is more than 12 months.

Key Changes in the Union Budget 2024

The Union Budget 2024 introduced several important changes to capital gains tax, which are summarised below:

• Hike in Short-Term Capital Gains Tax Rate for Equity Investments

One of the most notable changes in the 2024 budget is the increase in the short-term capital gains tax rate on equity investments. Previously, STCG from listed equity shares and equity-oriented mutual funds had a concessional tax rate of 15%. However, the new budget has raised this rate to 20%, effective from July 23, 2024.

• Introduction of a New Holding Period for Real Estate

The 2024 budget has also introduced a revision to the holding period for classifying real estate gains as long-term. Previously, long-term real estate gains were applicable if you were in possession of the property for more than 36 months. However, the new budget has reduced this holding period to 24 months.

Capital Gains Tax Exemption

Here is an overview of the various sections under which exemptions on capital gains tax in India are available:

• Section 54: Exemption on capital gains arising from the sale of a residential property (house or land) if you reinvest the gains in purchasing or constructing another residential property within a specified period.

• Section 54B: Exemption on capital gains from the sale of agricultural land, if you use the gains to purchase another piece of agricultural land within a stipulated time frame.

• Section 54EC: Exemption on capital gains if you invest in specific bonds, such as those National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC), within six months of the sale.

• Section 54F: Exemption on capital gains from the sale of any asset other than a residential property, if you reinvest the proceeds in a residential property within a set period.

• Section 54EE: Exemption on long-term capital gains if you invest in units of certain funds notified by the government within six months of the transfer.

• Section 54D: Exemption on capital gains arising from the compulsory acquisition of land and buildings used for industrial purposes.

• Section 54G: Exemption on capital gains from the transfer of assets in cases of shifting an industrial undertaking from an urban area to a rural area, if the gains are used to purchase new assets in the rural area.

• Section 54GA: Exemption on capital gains if the gains are used to shift an industrial undertaking from an urban area to a Special Economic Zone (SEZ) by purchasing new assets.

• Section 54GB: Exemption on capital gains arising from the sale of a residential property if you finance the returns in equity shares of an eligible start-up company, which then utilises the investment for purchasing new assets.

The Bottom Line

It is important to have a good understanding of taxes, exemptions and associated terms and conditions when seeking a capital gains tax exemption. Taxpayers should stay updated about recent changes and assess how they may affect their investment decisions and tax planning strategies.