The Union Budget 2024 introduced significant changes to the taxation of capital gains, aiming to simplify the system and enhance compliance. Among these updates, the Long-Term Capital Gains (LTCG) exemptions, particularly under Section 112A, are of considerable interest to taxpayers. This guide provides a detailed breakdown of the changes, exemptions, and qualifications for LTCG under the new tax regime.
What Is LTCG and How Is It Taxed?
Long-Term Capital Gains (LTCG) arise when capital assets such as equity shares, mutual funds, or other securities are sold after holding them for a specified duration, generating profits.
Under the new tax regime, LTCG on eligible equity-related assets is taxed at a flat rate of 12.5%, with an exemption of up to ₹1.25 lakh per financial year.
Key Changes Introduced in the 2024 Budget
1. Increased LTCG Exemption Limit
The tax exemption limit for LTCG under Section 112A has been raised:
- Old limit: ₹1 lakh
- New limit: ₹1.25 lakh
This exemption is applicable to equity shares, equity-oriented mutual funds, and units of business trusts, provided they meet specific conditions.
2. Simplified Holding Periods
The holding periods for determining whether an asset qualifies as long-term have been standardized:
- Listed securities: Holding period reduced from 36 months to 12 months.
- Other assets: Holding period reduced from 36 months to 24 months.
This change enhances consistency and benefits investors by reducing the duration required to qualify for LTCG.
3. Adjusted Tax Rates
- Short-Term Capital Gains (STCG): Increased to 20% for equity investments, up from 15%.
- LTCG: Flat rate of 12.5% for all eligible assets.
These rates are applicable to any transfer made on or after July 23, 2024.
Section 112A: LTCG Exemption Details
Under Section 112A, taxpayers can claim exemptions of up to ₹1.25 lakh for LTCG, subject to the following conditions:
- Eligible Assets:
- Equity shares.
- Units of equity-oriented mutual funds.
- Units of business trusts (e.g., REITs and InvITs).
- Holding Period:
- Assets must be held for more than one year to qualify as long-term capital assets.
- Securities Transaction Tax (STT):
- Both purchase and sale of equity shares must attract STT.
- For equity-oriented mutual fund units or business trusts, only the sale transaction requires STT payment.
By meeting these criteria, taxpayers can effectively reduce their taxable LTCG and lower their overall tax liability.
Grandfathering Provisions
Grandfathering provisions protect gains accrued before the introduction of new tax rules:
- Applies to listed equity shares, units of equity-oriented mutual funds, and units of business trusts acquired before January 31, 2018, and sold after February 1, 2018.
- Gains accrued until January 31, 2018, are exempt from LTCG taxation.
- Gains beyond this date are subject to the current LTCG tax rules.
This ensures fair treatment for investments made under the old tax framework.
Illustrative Example: Calculating LTCG
Scenario:
- Asset: Equity shares.
- Purchase Date: January 1, 2023.
- Sale Date: August 1, 2024.
- Purchase Price: ₹2,00,000.
- Sale Price: ₹4,00,000.
Step 1: Determine LTCG
LTCG = Sale Price – Purchase Price = ₹4,00,000 – ₹2,00,000 = ₹2,00,000.
Step 2: Apply Exemption
Exempt Amount = ₹1.25 lakh (under Section 112A).
Taxable LTCG = ₹2,00,000 – ₹1,25,000 = ₹75,000.
Step 3: Calculate Tax
Tax = 12.5% of ₹75,000 = ₹9,375.
How Do the Changes Benefit Taxpayers?
- Reduced Holding Period: Investors can qualify for long-term tax benefits faster.
- Higher Exemption Limit: The increase to ₹1.25 lakh reduces taxable gains for equity investors.
- Simplified Tax Structure: Flat LTCG rates provide clarity and ease of calculation.
Things to Keep in Mind
- Applicability: The new rules apply to transfers made on or after July 23, 2024.
- Comprehensive Compliance: Ensure STT compliance for all transactions to claim exemptions.
- Long-Term Focus: The changes incentivize long-term investments in equity and other eligible assets.
Conclusion
The updated LTCG rules under the new tax regime streamline the tax system, making it more investor-friendly. With reduced holding periods, increased exemptions, and flat tax rates, these changes encourage long-term investments in equity and related assets.
Taxpayers should carefully review their portfolios and align their investment strategies to maximize benefits under the revised framework. For specific cases, consulting a tax advisor is recommended to ensure compliance and optimize tax savings.
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