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 insights around the following:

• Recent Budget Updates on Capital Gains
• What is capital gains tax
• Capital gains Tax Rules for different asset classes
• Tax exemptions on capital gains
• Conclusion 

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.
• 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 was available previously 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 24 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 both movable properties and immovable ones 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 24 months, (which was 36 months for assets sold before July 23rd, 2024) 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:   

*From 23rd July 2024, STCG rate has been increased to 20%.
** From 23rd July, 2024, LTCG is taxed at 12.5% on the amount exceeding Rs.1.25 lakh within a financial year without indexation benefit.

• Debt Instruments

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

Important - As per the Finance Bill 2023, there are no indexation benefits on debt mutual funds and they are taxed at the individual's slab rate.

• Real Estate Investments

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

* From 23rd July, 2024, LTCG is taxed at 12.5% on the amount exceeding Rs.1.25 lakh within a financial year. Also,  property buyers who have acquired a property before July 23rd, 2024 have a choice to pay tax at the rate of 20%  with indexation benefit or 12.5% without indexation benefit.

• 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:

*From 23rd July 2024, there are only two holding periods (12 months and 24 months). 12 months is for listed securities and 24 months is for all other types of assets. STCG is taxed at 15% now.
** From 23rd July, 2024, LTCG is taxed at 12.5% on the amount exceeding Rs.1.25 lakh within a financial year without indexation benefits.

• 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: 

*From 23rd July 2024, STCG rate has been increased to 20%.
** From 23rd July, 2024, LTCG is taxed at 12.5% on the amount exceeding Rs.1.25 lakh within a financial year without indexation benefit.

• 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. 

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