The Union Budget for 2024-25 has introduced a significant capital gains tax regime adjustment. In her Budget speech on Tuesday, Finance Minister Nirmala Sitharaman said, “A beginning is being made in the Finance Bill by simplifying the tax regime for charities, TDS rate structure, provisions for reassessment and search provisions and capital gains taxation.”
Long-term financial assets have been listed and held for more than a year. To be considered long-term, all non-financial assets and unlisted financial assets must be held for a minimum of two years. Regardless of the holding period, unlisted bonds, debentures, debt mutual funds and market-linked debentures will be subject to capital gains tax at the applicable rates.
Long-term capital gains tax (LTCG): The tax on long-term capital gains has been increased from the existing 10 per cent to 12.5 per cent for both financial and non-financial assets. “For the benefit of the lower and middle-income classes, I propose to increase the limit of exemption of capital gains on certain financial assets to Rs 1.25 lakh per year,” said Sitharaman.
Short-term capital gains tax (STCG): The tax rate for short-term capital gains on certain financial assets has been set at 20 per cent for certain assets “while that on all other financial assets and all non-financial assets shall continue to attract the applicable tax rate,” Sitharaman said.
These tax hikes will impact investors, making it essential to understand the difference between long-term and short-term capital gains and their tax calculations.
Capital Gains
First, let’s understand what capital gains tax is. It refers to the tax imposed on the profit or gain earned from the sale of a capital asset. This income is taxed in the financial year when the asset is sold or transferred. There are two types of capital gains: Long-Term Capital Gains and Short-Term Capital Gains.
Calculating Capital Gains Tax
Long-Term
- Note down the total value obtained from the sale of the asset.
- Deduct the following from that amount:
- Expenses directly related to the transfer of the asset
- Indexed cost of acquisition, after adjusting for inflation
- Indexed cost of improvements, again after adjusting for inflation
- Any exemptions available under Sections 54, 54D, 54EC, 54F, and 54B.
- The remaining amount is the long-term capital gain, subject to taxation.
Short-Term
- Identify the full value received from the sale of the asset.
- Deduct the following expenses from the total value:
- Costs directly associated with the sale
- Original purchase price of the asset
- Costs of any improvements made to the asset
- Any exemptions are allowed under Sections 54B and 54D.
- The amount that’s left is the short-term capital gain, which will be taxed.