Budget 2024-25: Long-Term Capital Gains Tax Increased to 12.5%

The 2024-25 Union Budget introduced a significant change to India’s tax landscape by increasing the long-term capital gains (LTCG) tax rate from 10% to 12.5%. This adjustment, along with updates to exemption limits and tax rates on other gains, could have far-reaching implications for investors and businesses. Let’s break down what this means for you.

Understanding the Changes to Capital Gains Tax

Long-Term Capital Gains (LTCG) Tax Hike

LTCG tax applies to profits earned from assets held over a certain period:

• New Tax Rate: Increased to 12.5% (from the previous 10%).

• Holding Period: For listed financial assets, the qualifying holding period remains more than one year. For unlisted financial and non-financial assets, the period is more than two years.

  
  

While the increase makes long-term investments slightly less profitable, it still incentivizes holding assets for longer durations compared to short-term gains.

Short-Term Capital Gains (STCG): Gains on assets sold within one year continue to be taxed at 20%, which is higher than the new LTCG rate.

Exemption Limit Raised

Small investors received some relief with the increase in the annual capital gains exemption limit from ₹1 lakh to ₹1.25 lakh. This change allows marginal taxpayers to retain more of their investment returns.

How This Impacts Investors

1. Reduced Returns on Long-Term Investments

The hike in LTCG tax means investors will see slightly lower returns on long-term holdings, which could discourage some from staying invested for extended periods.

2. Impact on Market Sentiment

Higher taxes might make retail investors cautious, especially in a market where equity participation had recently seen significant growth. Experts have also raised concerns about the stability of tax policies and their potential to discourage investments in equities, affecting market growth and liquidity.

3. Balancing Short-Term and Long-Term Gains

For investors navigating these changes, smart tax planning becomes crucial. Holding assets for the long term can still be advantageous despite the tax hike, as STCG continues to attract a higher rate of 20%.

Addressing STT and Capital Gains Tax Together

When the Securities Transaction Tax (STT) was introduced, it replaced LTCG tax on securities. However, with the reintroduction of LTCG tax alongside STT, investors are now responsible for paying both taxes, which some feel is a double burden.

Navigating such complexities requires careful tax planning and compliance management. If your business needs assistance with GST, income tax filings, or handling capital gains taxes, a reliable compliance partner can help.

Preparing for the Future

The increased exemption limit is a positive step for small investors, but the overall changes have raised questions about the long-term impact on investment behavior. The next financial year will reveal how these adjustments influence market dynamics and investor confidence.

As an auditing firm, we can assist you with navigating these changes, ensuring compliance, and planning for tax efficiency. Whether it’s company registration, GST filings, tax planning, or audit services, our team offers a comprehensive suite of solutions tailored to your needs.

For businesses and investors alike, staying compliant and prepared is key to thriving in a shifting tax environment. Let us help you make sense of it all.