Capital Gains for Beginners

Assets like stocks, bonds, property, mutual fund units, etc., are great investment options that generate capital gains when sold/redeemed. Thus, they are called capital assets, and the profits generated from their sale are liable for taxation under the head capital gains.

So, if you are thinking of investing in such assets, it is important to know about capital gains tax, its types, and available exemptions. Keep reading for a deeper insight! 

Budget 2024 Updates

Budget 2024 has proposed the following changes effective from FY 24-25 

• For classifying assets into long-term and short-term, there will only be two holding periods: 12 months and 24 months. The 36-month holding period has been removed. The holding period for all listed securities is 12 months. All listed securities with a holding period exceeding 12 months are considered Long-Term. The holding period for all other assets is 24 months.
• Unlisted bonds and debentures are brought in line with the taxation on debt mutual funds and market-linked debentures. They will attract tax on capital gains at applicable slab rates. (i.e., they will be treated as short-term irrespective of the period of holding)
• The taxation of Short-Term Capital Gain for listed equity shares, a unit of an equity-oriented fund, and a unit of a business trust has been increased to 20% from 15%. Other financial and non-financial assets which are held for short term shall continue to attract the tax at slab rates.
• For the benefit of the lower and middle-income classes, the limit on the exemption of Long-Term Capital Gains on the transfer of equity shares or equity-oriented units or units of Business Trust has increased from Rs.1 Lakh to Rs.1.25 lakh per year. However, the rate at which it is taxed has increased from 10% to 12.5%.
• The exemption limit of Rs. 1.25 lakhs has been increased for the whole of the year, whereas the tax rate changed on 23rd July 2024.
• The tax on long-term capital gains on other financial and non-financial assets is reduced from 20% to 12.5%. While on the other hand, the indexation benefit that previously was available on sale of long-term assets, has now been done away with. So, any sale of long term asset made from 23rd July, 2024, will attract tax rate of 12.5% only without indexation benefit. 

What is Capital Gains Tax?

As mentioned above, when you gain profits from the sale of capital assets, there are tax implications. This is called capital gains tax. Now, based on the time period you hold on to these assets, there can be two types of applicable capital gains tax:

• Short-term capital gains tax or
• Long-term capital gains tax

Short-term capital gains tax

When you sell your capital assets after holding them for a period of less than or equal to 36 months, it would be considered a short-term asset. Thus, profits from its sale are liable for short-term capital gains (STCG) tax. This is applicable to movable properties. For immovable ones, the holding period threshold is 24 months and for listed securities and equity-oriented funds the holding period threshold is 12 months.

The applicable tax rate can vary as per the asset class. 

Long-term capital gains tax

Now, when you sell assets after holding them for a tenure of more than 36 months, they fall under long term assets. Thus, profits from their sale attract long term capital gains (LTCG) tax. In this case as well, the tax rate would depend on the asset class. 

It is also to be noted that the holding period threshold for some assets may differ such as for immovable properties the holding period should exceed 24 months and for listed securities and equity-oriented funds it should exceed 12 months.

Capital Gains Tax Rules for Different Asset Classes

The capital gains tax rules could vary from one asset class to the other. These rules have been discussed below:

• Equity shares

Equity shares can be divided into three categories - listed domestic, unlisted domestic and foreign. Find their applicable capital gains tax rates in the table below:   

• Debt Instruments

Debt or fixed-income instruments can either be listed or unlisted. Their applicable capital gains tax rates are:

• Real Estate Investments

In case of real estate, the applicable capital gains tax rates are as follows:

• Gold Investments

When it comes to investing in gold, individuals prefer Sovereign Gold Bonds (SGBs), gold mutual funds, Gold ETFs and digital gold. They are an attractive alternative to traditional gold investments. Check out their capital gains tax rates in the table below:

• Mutual Funds

When it comes to mutual funds, they can be divided into equity, debt, equity hybrid, debt hybrid and international funds. Their applicable capital gains tax rates are as follows: 

• Exchange Traded Funds

Exchange Traded Funds (ETFs) are categorised into index, sectoral, gold and international. Find their capital gains tax rates in the table below: 

What are the Tax Exemptions on Capital Gains?

You can avail tax benefits on capital gains under the following sections of the IT Act:

• Section 54

Under Section 54 of the IT Act, when you sell a residential property and invest the proceeds for buying another house, it is exempt from taxation. However, there are certain conditions. You have to buy the new property within 1 year before the transfer is complete or 2 years after. Moreover, you can avail this benefit if the new residential property’s construction finishes within 36 months from the date of sale of the old one.  

• Section 54EC

If you reinvest the profits from the sale of a long-term asset into securities of the National Highways Authority of India (NHAI) or Rural Electrification Company (REC), it is liable for tax exemption under Section 54EC. But, the reinvestment must take place within 6 months of the sale and a maximum investment upto Rs.50 lakhs only can be made during a financial year.

• Section 54EE

Investing capital gains in funds specified by the central government can also help you avail tax deductions. You have to complete the investment within 6 months from the sale of your capital asset and the amount must not exceed Rs.50 lakh. 

You can read more about such exemptions in our article here

Final Word

Please note that, as per updates announced in the 2023 Budget speech, all debt mutual fund investments after 1 April 2023 will not receive the tax benefit associated with LTCG. Only short-term capital gains tax will be applicable as per the investor’s applicable tax slab. 

Related Articles

Capital Gains Tax

Long-term capital gains

Short-term capital gain

Tax on Long-term Capital Gains on Equity Funds

Short Term Capital Gain on Shares

Capital Gains Exemption

Section 54F