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:
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Short-Term Capital Assets (STCA): if held for not more than the prescribed holding period
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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:
| Category | Asset Type | Before 23 July 2024 | From 23 July 2024 onwards |
|---|---|---|---|
| A | i. 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 |
| B | i. Unlisted shares ii. Immovable property (land or building) | STCA: ≤ 24 months LTCA: > 24 months | STCA: ≤ 24 months LTCA: > 24 months |
| C | Any other capital asset including debt mutual funds, gold, debentures | STCA: ≤ 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 Gain | Tax Rate Before 23 July 2024 | Tax Rate From 23 July 2024 |
|---|---|---|
| LTCG (Section 112A) | 10% on gains exceeding ₹1 lakh | 12.5% on gains exceeding ₹1.25 lakh |
| STCG (Section 111A) | 15% | 20% |
| Type of Gain | Tax Treatment Before 23 July 2024 | Tax Treatment From 23 July 2024 |
|---|---|---|
| LTCG | 20% with indexation | Lower of 20% with indexation or 12.5% without indexation (for Individual/HUF) |
| STCG | Taxed as per applicable slab rates | Same treatment (slab-based) |
| Type of Gain | Before 23 July 2024 | From 23 July 2024 |
|---|---|---|
| LTCG | 20% with indexation | 12.5% without indexation |
| STCG | Taxed at slab rates | Same 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):
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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 Gain | If Acquired before 1 April 2023 | If Acquired on or after 1 April 2023 |
|---|---|---|
| LTCG | 20% with indexation | Not applicable |
| STCG | Slab rate | Slab rate |
| Type of Gain | If Acquired Anytime | Tax Rate From 23 July 2024 |
|---|---|---|
| LTCG | 10% above ₹1.25 lakh | 10% above ₹1.25 lakh |
| STCG | 15% | 20% |
5. Interpretation and Impact
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The reduced holding period for "other capital assets" (from 36 to 24 months) offers faster access to long-term benefits.
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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.
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Increased STCG rates (from 15% to 20%) for equity investors may impact short-term trading behavior.
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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:
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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).
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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 Class | Holding Period at Sale | LTCG Tax Rate (Old vs New) | Optimal Exit Strategy |
|---|---|---|---|
| Equity Shares | > 12 months | 10% (old), 12.5% (new) | Harvest gains up to ₹1.25 lakh annually |
| Debt Funds (post 1 April 2023 purchase) | Any | Slab rate only | Consider fixed deposits or tax-free bonds |
| Immovable Property | > 24 months | 20% or 12.5% (new) | Evaluate indexation benefit before sale |
| Gold / Unlisted Bonds | 25–36 months | 20% vs 12.5% (new) | Postpone sale till 24 months to qualify as LTCA |
| Unlisted Shares | > 24 months | 20% 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.
