Monday, July 21, 2025

Capital Gains Tax Overhaul - Major Changes from 23 July 2024

 Capital gains tax is a critical component of income tax under the Income-tax Act, 1961, levied on profits arising from the transfer of a capital asset. The Finance Act (No. 2), 2024 has introduced substantial amendments to the computation, holding period classification, and tax rates, particularly impacting debt mutual funds, unlisted shares, and immovable properties. These changes come into effect from 23 July 2024 and are applicable for Assessment Year (AY) 2025-26 onwards.

Let’s break down the legislative updates and their implications.

1. Statutory Framework and Definitions

As per Section 2(14) of the Income-tax Act, 1961, a capital asset includes property of any kind held by an assessee, whether or not connected with their business or profession, but excludes stock-in-trade, personal effects, and certain rural agricultural land.

Capital gains arising from the transfer of such assets are governed by Section 45, and the computation provisions are laid down in Sections 48 to 55.

Capital assets are classified into:

  • Short-Term Capital Assets (STCA): if held for not more than the prescribed holding period

  • Long-Term Capital Assets (LTCA): if held for more than the prescribed holding period

The tax treatment varies depending on the asset class, period of holding, and date of acquisition.

2. Revised Holding Period Classification

The Finance Act (No. 2), 2024 has rationalized holding periods for the purpose of capital gains classification. The updated rules, effective from 23 July 2024, are as follows:

CategoryAsset TypeBefore 23 July 2024From 23 July 2024 onwards
Ai. Listed equity shares
ii. Units of UTI
iii. Equity-oriented mutual funds
iv. Zero-coupon bonds
STCA: ≤ 12 months
LTCA: > 12 months
STCA: ≤ 12 months
LTCA: > 12 months
Bi. Unlisted shares
ii. Immovable property (land or building)
STCA: ≤ 24 months
LTCA: > 24 months
STCA: ≤ 24 months
LTCA: > 24 months
CAny other capital asset including debt mutual funds, gold, debenturesSTCA: ≤ 36 months
LTCA: > 36 months
STCA: ≤ 24 months
LTCA: > 24 months

3. Revised Tax Rates on Capital Gains

The following rates shall apply to transfers made on or after 23 July 2024:

(a) Listed Equity Shares and Equity-Oriented Mutual Funds (Section 112A and Section 111A)

Type of GainTax Rate Before 23 July 2024Tax Rate From 23 July 2024
LTCG (Section 112A)10% on gains exceeding ₹1 lakh12.5% on gains exceeding ₹1.25 lakh
STCG (Section 111A)15%20%

(b) Immovable Property (Section 48 and 112)
Type of GainTax Treatment Before 23 July 2024Tax Treatment From 23 July 2024
LTCG20% with indexationLower of 20% with indexation or 12.5% without indexation (for Individual/HUF)
STCGTaxed as per applicable slab ratesSame treatment (slab-based)

(c) Other Capital Assets (including debt funds, gold, bonds, etc.)
Type of GainBefore 23 July 2024From 23 July 2024
LTCG20% with indexation12.5% without indexation
STCGTaxed at slab ratesSame treatment (slab-based)

4. Mutual Fund Taxation

Tax treatment differs based on the asset allocation and acquisition date:

(i) Debt Mutual Funds

Per proviso to Section 50AA (inserted via Finance Act, 2023):

  • If acquired on or after 1 April 2023 and invest less than 65% in equities, the gains are treated as short-term, irrespective of holding period, and taxed at slab rates.

Type of GainIf Acquired before 1 April 2023If Acquired on or after 1 April 2023
LTCG20% with indexationNot applicable
STCGSlab rateSlab rate

(ii) Equity Mutual Funds (STT-paid and >65% equity exposure)
Type of GainIf Acquired AnytimeTax Rate From 23 July 2024
LTCG10% above ₹1.25 lakh10% above ₹1.25 lakh
STCG15%20%

5. Interpretation and Impact

  • The reduced holding period for "other capital assets" (from 36 to 24 months) offers faster access to long-term benefits.

  • Shift from indexation-based 20% LTCG to flat 12.5% creates a trade-off. High-cost base assets may benefit from the flat rate; others may still prefer indexation.

  • Increased STCG rates (from 15% to 20%) for equity investors may impact short-term trading behavior.

  • For debt mutual funds, the loss of indexation and compulsory STCG treatment (since 1 April 2023) continues to make them less attractive compared to equity options.

6. Taxability in Assessment Year 2025-26

Capital gains from transactions executed on or after 23 July 2024 will be taxed as per the revised provisions, and such gains shall be reportable in the Income-tax Return (ITR) for AY 2025-26 (Financial Year 2024-25).

For example:

  • A property sold on 25 July 2024 after 3 years of holding will have the option of paying either 12.5% without indexation or 20% with indexation (whichever is beneficial).

  • Debt fund gains from units acquired after 1 April 2023 and redeemed in August 2024 will be treated as STCG and taxed at slab rates.

7. Client Planning Matrix: Capital Gains Exit Strategy

A simplified matrix to assist clients in exit strategy planning post 23 July 2024:

Asset ClassHolding Period at SaleLTCG Tax Rate (Old vs New)Optimal Exit Strategy
Equity Shares> 12 months10% (old), 12.5% (new)Harvest gains up to ₹1.25 lakh annually
Debt Funds (post 1 April 2023 purchase)AnySlab rate onlyConsider fixed deposits or tax-free bonds
Immovable Property> 24 months20% or 12.5% (new)Evaluate indexation benefit before sale
Gold / Unlisted Bonds25–36 months20% vs 12.5% (new)Postpone sale till 24 months to qualify as LTCA
Unlisted Shares> 24 months20% or 12.5%Compare benefit of indexation vs flat rate

Conclusion

The Finance Act (No. 2), 2024 marks a strategic shift in capital gains taxation, signaling simplification through uniformity but reducing some of the long-standing incentives like indexation. Investors and taxpayers must carefully evaluate the nature of the asset, acquisition date, and potential gains before exiting, especially in light of increased flat tax rates and elimination of indexation in several cases.