Changes proposed in Capital Gains Tax in Union Budget 2024-2025

The bromance of Capital Gains and each finance minister every year is known to one and all. There would have been hardly a year in the history of presentation of Union Budget when Finance Ministers would have refrained from making any changes in Capital gains tax. From introduction of Securities Transaction Tax substituting long term capital gains tax to reintroduction of long term capital gains tax keeping Securities transaction tax intact to finally increasing long terms capital gains tax and increasing securities transaction tax simultaneously, history has witnessed all changes. With every change proposed in the Union Budgets and finally getting shape in Finance Acts, complications have reigned supreme for tax payers and tax practitioners also. Well, not to forget, as it is common with all love stories, this love story too has always faced opposition from the big daddy, you guessed it right, the financial markets.

So, what are the changes proposed in Union Budget 2024-2025 in Capital Gains scheme and tax. Let’s scratch our heads and try to fathom the fine print

Smt. Nirmala Sitaraman has emphasized the need for Rationalisation and Simplification of taxation of Capital Gains in her budget speech and has made proposals in this regard in the Union Budget presented for 2024-2025. So what is this rationalization and simplification of taxation of Capital Gains all about and how will the economy manage to achieve it. Further, due to tremendous hue and cry in the real estate sector, certain amendments have been made while obtaining assent of the Hon’ble President of India on the 16^th of August, 2024 to the proposed Finance Bill. Let us understand the objective of rationalization and simplification and the measures proposed by the Government for achieving the same and what amendments have been further made when the Finance Bill transformed into the Finance Act in this article.

Considering the changes made after proposing the Finance Bill and the scenario pre-23rd July, 2024 and post 23^rd July, 2024, let us divide this article into 2 parts viz., 1. Effective capital gain tax w.e.f. 24^th July, 2024 and 2. Capital Gain tax upto 24^th July, 2024.

First, let us analyse effective capital gain tax w.e.f. 24^th July, 2024 and the changes now made

To understand capital gains, it is imperative for us to understand the types of capital assets which will be impacted when sold

Following are the various type of capital assets, which when sold will attract tax known as capital gain tax

1. Stocks
2. Equity mutual funds
3. Debt and non-equity mutual funds
4. Bonds (listed)
5. REITs/InVITs
6. Equity FoFs
7. Gold / Silver ETF
8. Overseas FoF
9. Gold Funds
10. Real Estate
11. Bonds (unlisted)
12. Physical Gold
13. Stocks (unlisted)
14. Foreign equities / debt

Let us now see the existing tax structures for these assets

Asset type	Short Term Capital Gain Tax	Long Term Capital Gain Tax
Stocks	15%	10%
Equity mutual funds	15%	10%
Debt and non-equity mutual funds	Slab rate	Slab rate
Bonds (listed)	Slab rate	10%
REITs/InVITs	15%	10%
Equity FoFs	Slab rate	Slab rate
Gold / Silver ETF	Slab rate	Slab rate
Overseas FoF	Slab rate	Slab rate
Gold Funds	Slab rate	Slab rate
Real Estate	Slab rate	20% (with indexation)
Bonds (unlisted)	Slab rate	Slab rate
Physical Gold	Slab rate	20% (with indexation)
Stocks (unlisted)	Slab rate	20% (with indexation)
Foreign equities / debt	Slab rate	20% (with indexation)

I am sure the viewers will concur with me that complications in tax structure to this extent as mentioned hereinabove has always remained a pain in the neck for each tax payer all through these years necessitating a common investor to seek professional guidance in calculating tax liability and filing the returns of income.

This exactly has given birth to this proposal of Rationalisation and Simplification of taxation of Capital Gains which our Hon’ble Finance Minister referred to in her budget speech.

So, what happens now and how will it be different from the existing tax structure. Let us understand

It has now been proposed that if any of the above asset is sold within the minimum holding period (holding period specified for each type of capital asset), then the sale of such asset will be categorized as short term capital gain and the same will be charged to tax as under:

Asset type	Short Term Capital Gain Tax
Stocks	20%
Equity mutual funds	20%
Debt and non-equity mutual funds	Slab rate
Bonds (listed)	20%
REITs/InVITs	20%
Equity FoFs	20%
Gold / Silver ETF	20%
Overseas FoF	Slab rate
Gold Funds	Slab rate
Real Estate	Slab rate
Bonds (unlisted)	Slab rate
Physical Gold	Slab rate
Stocks (unlisted)	Slab rate
Foreign equities / debt	Slab rate

You will now ask what is the difference except for increase in short term capital gain tax rate. If the above table is read carefully, it will be understood that more number of items have now been assigned a tax rate instead of charging at slab rate. Thus, the list of items having special rate of tax has increased compared to the past.

However, this rationalization and simplification process is not just restricted to changes made in Short Term Capital Gains Tax. Let us analyse changes done in long term capital gain tax. Follow this table

Asset type	Long Term Capital Gain Tax
Stocks	12.50%
Equity mutual funds	12.50%
Debt and non-equity mutual funds	Slab rate
Bonds (listed)	12.50%
REITs/InVITs	12.50%
Equity FoFs	12.50%
Gold / Silver ETF	12.50%
Overseas FoF	12.50%
Gold Funds	12.50%
Real Estate	12.50%
Bonds (unlisted)	Slab rate
Physical Gold	12.50%
Stocks (unlisted)	12.50%
Foreign equities / debt	12.50%

Upon following the above table, we can draw the following inferences :

1. Except for Debt and non-equity mutual funds and unlisted bonds, which are continued to be taxed at slab rates, all other capital assets, when sold in long term will now be taxed at a single rate of 12.50%
2. Earlier, benefit of indexation was given on certain categories of assets like real estate, physical gold, unlisted shares etc whereas other categories of assets did not carry such a benefit thus complicating the tax structure. It can now be observed that indexation has been completely withdrawn for all purchases made after 23^rd July, 2024 of all the said assets and now long term capital gain tax will be charged at a flat rate of 12.50% except for 2 assets as mentioned hereinabove.

This is the basic intention behind rationalization and simplification of capital gains. Thus, now, most of the assets when sold in long term will attract single rate of tax and there is no secondary caveat of with / without indexation

So now we come to the moot question of this discussion and that is whether this rationalization and simplification is a welcome move from the point of view of burden of tax on the seller or has it aggravated the already nagging pain.

Well, it appears that, for assesses falling under tax bracket of more than 15%, capital assets now getting taxed at 12.50% instead of slab rate in old regime will lead to a reduction in the tax burden, particularly for those capital assets which were not enjoying benefit of indexation.

However, the impact is different in case of those assets which were earlier eligible for the benefit of indexation to factor in the effects of inflation on the cost of acquisition as these will now be taxed at the time of sale at a flat rate of 12.50% without indexation. Thus in the long run, the impact of taxation will be higher on the assessee as had the benefit of indexation continued, the cost of acquisition would have been indexed to factor in the inflation and eventually the gains arising at the time of sales would had reduced thus reducing the tax liability under capital gains. Also, with no change done in Sec 54 / sec 54B / sec 54G, the amount of investment that an assessee will have to make in the future to avoid the burden of capital gains tax will increase as the section states that the benefit of exemption will be related to the capital gains. Thus, if the capital gains increase due to removal of indexation, the minimum investment that an assessee will have to make in the future will consequently increase. However, it is improbable to analyse these effects in current date and considering any hypothetical situation will be misleading for the readers.

Let us now understand case 2 which is changes in capital gain tax upto 24^th July, 2024.

Under this scenario all other changes that have been discussed hereinabove in Scenario 1 remain the same except for 1 major change which impacts capital gains tax in case of real estate transactions.

As discussed hereinabove, at the time of calculating long term capital gains tax on sale of immovable properties like land and building, cost of acquisition was indexed adopting cost inflation index declared for each year to factor in the effect of inflation. This escalated the original cost of acquisition, bringing it in parity with its tentative value at the time of sale. Accordingly, while calculating long terms capital gains tax, the original cost of acquisition was replaced by the indexed cost of acquisition and the capital gains arrived were indexed capital gains. This indexed capital gain was lower than the actual profit on sale of the property. This benefit of indexation was proposed to be withdrawn as we discussed hereinabove but after a huge uproar in the industry as well as investors, the government decided to make certain changes in the proposal which are as under :

The benefit of indexation is restored back subject to the following :

1. It is applicable only to resident individuals and HUF
2. It is applicable only to sale of immovable property viz., land or building
3. It is applicable only if the property sold is purchased upto 23^rd July, 2024.

So far so good. The assesses may be experiencing huge relief with this roll back. However before we start rejoicing and applauding this move of the government, there are a few points which need to be understood.

Firstly, as mentioned hereinabove, the benefit is available to only resident individuals or HUF. Thus, non-residents will continued to be covered under the changed regime and so will other categories of assesses like partnership firms, LLPs, corporates etc. This is the first curtailment in the benefit extended

Secondly, the benefit of indexation is available only to those properties purchased prior to 24^th July, 2024. Thus, properties purchased after 23^rd July, 2024 will be covered under the amended regime and the consequences are already discussed in Scenario 1.

Also, the benefit is only on sale of immovable properties. Thus other assets held for long term and sold such as bullion will continue to be taxed under amended regime.

The list does not end here. There are more tremors to come and the biggest tremor is as under :

I will reproduce hereunder the exact wordings of the amendments made :

“Provided further that in the case of transfer of a long-term capital asset, being land or building or both, which is acquired before the 23rd day of July, 2024, where the income-tax computed under item (B) exceeds the income-tax computed in accordance with the provisions of this Act, as they stood immediately before their amendment by the Finance (No. 2) Act, 2024, such excess shall be ignored;”

Item (B) here refers to

the amount of income-tax calculated on such long-term capital gains at the rate of twelve and one-half per cent. for any transfer which takes place on or after the 23rd day of July, 2024

To simplify, the meaning of this amendment is that any excess tax accruing under the new regime i.e. @ 12.5% of non indexed capital gains over indexed capital gains shall be ignored. This further means that the capital gains that shall be charged to tax will get restricted to indexed capital gains that have been calculated over all these years. Further, the assessee has to decide upon the option to be exercised i.e. to claim benefits of indexation or not to claim and thereby pay lower tax. As far as gains are concerned, this stance is to the benefit of the assessee and the assessee will opt for the old regime without a second thought. However, it is interesting to understand the impact in case of capital loss.

Let us understand the comparison with certain 2 illustrations viz., one with capital gains and other with capital loss.

Mr. A purchased a residential house property on 15^th Dec., 2002 for Rs. 10,00,000/- and he is selling on 15^th August, 2024 for Rs. 1,00,00,000/-

The comparison between tax under old regime and new regime is as under :

Particulars	Old Regime	New Regime
Date of Acquisition	15th Dec., 2002	15th Dec., 2002
Cost of Acquisition	Rs. 10,00,000/-	Rs. 10,00,000/-
Indexed Cost of Acquisition	Rs. 10,00,000/- * 363/105 = Rs. 34,57,143/-	————-
Sale consideration	Rs. 1,00,00,000/-	Rs. 1,00,00,000/-
Date of sale	15th August, 2024	15th August, 2024
Capital Gains	Rs. 1,00,00,000 – Rs. 34,57,143 = Rs. 65,42,857/-	Rs. 1,00,00,000 – Rs. 10,00,000 = Rs. 90,00,000/-
Tax rate on capital gains	20%	12.50%
Capital Gains Tax	Rs. 65,42,857/- * 20% = Rs. 13,08,571	Rs. 90,00,000/- * 12.50% = Rs. 11,25,000/-

It can be thus observed that inspite of withdrawal of indexation, tax under capital gains as per new regime is lower than the tax as per old regime i.e. after benefits of indexation and hence any prudent assessee will opt for new regime.

Let us now tweak the above data a bit

Particulars	Old Regime	New Regime
Date of Acquisition	15th Dec., 2002	15th Dec., 2002
Cost of Acquisition	Rs. 20,00,000/-	Rs. 20,00,000/-
Indexed Cost of Acquisition	Rs. 20,00,000/- * 363/105 = Rs. 69,14,286/-	————-
Sale consideration	Rs. 1,00,00,000/-	Rs. 1,00,00,000/-
Date of sale	15th August, 2024	15th August, 2024
Capital Gains	Rs. 1,00,00,000 – Rs. 69,14,286 = Rs. 30,85,714/-	Rs. 1,00,00,000 – Rs. 20,00,000 = Rs. 80,00,000/-
Tax rate on capital gains	20%	12.50%
Capital Gains Tax	Rs. 30,85,714/- * 20% = Rs. 6,17,143/-	Rs. 80,00,000/- * 12.50% = Rs. 10,00,000/-

Thus it can be observed that the tax on capital gains as per new regime is substantially higher than the tax as per old regime. Thus, the assessee will undoubtedly select option of old regime and his tax liability will stand restricted to Rs. 6,17,143/- and excess tax of Rs. 3,82,857/- (Rs. 10,00,000/- – Rs. 6,17,143/-) will be ignored.

Let us again add 1 more twist to our illustration as under:

Particulars	Old Regime	New Regime
Date of Acquisition	15th Dec., 2022	15th Dec., 2022
Cost of Acquisition	Rs. 50,00,000/-	Rs. 50,00,000/-
Indexed Cost of Acquisition	Rs. 50,00,000/- * 363/331 = Rs. 54,83,384/-	————-
Sale consideration	Rs. 40,00,000/-	Rs. 40,00,000/-
Date of sale	15th August, 2024	15th August, 2024
Capital Loss	Rs. 40,00,000 – Rs. 54,83,384 = Rs. 14,83,384/-	Rs. 40,00,000 – Rs. 50,00,000 = Rs. 10,00,000/-

In the case of loss, as per the amended provisions, the loss shall get restricted to the amount arrived at as per new regime i.e. Rs. 10,00,000/- in our case. Thus, the assessee will have to forego additional loss of Rs. 4,83,384/- (Rs. 14,83,384 – Rs. 10,00,000/-) since the option of grandfathering i.e. comparison tax liability between old regime and new regime and exercising option of paying lower tax is applicable on tax liability. In the case of zero tax i.e. in the case of loss, there is no option of grandfathering and hence the assessee will have to adopt the new regime of capital gains tax and claim the benefit of reduced long term capital loss.

Impact of reduction in long term capital loss :

Long Term capital loss is eligible for set off against long term capital gains arising in current year and if the long term capital gains in the current year are not sufficient enough to absorb the entire long term capital loss, then the remaining long term capital loss can be carried forward for set off upto following 8 assessment years.

Since loss calculated as per new regime is only available for set off or carry forward, income remaining after set off will increase in comparison to old regime resulting in higher tax outflow and in the case of carry forward also, since the loss allowed to be carried forward will be the one that is derived as per new regime, incomes in future years after set off of brought forward loss will be higher than the income that used to accrue as per the old regime, again leading to higher tax burden on the assessee. All this is due to the fact that the grandfathering benefit given to the assessee applies only to gains and not to losses.

It can thus be experienced that though benefits by restoring indexation have been given to the assessee, they will provide only partial relief. So, if an assessee feels that he has got a full glass of benefit, in reality, it is only a glass half full.

The finance minister should end her budget speech with “Picture toh abhi baaki hai mere dost”