The Changes in Capital Gain Tax Done by Modi 3.0 Budget 2024-25 You Need to Know

This was intended to do away with the disparities in the tax treatment of capital gains, making it simpler for assessees, and helping them plan sensibly for their financial future.

[Read: Why Modi 3.0's Full Budget Needs to Harmonize Capital Gains Tax]

In the full budget 2024-25 presented on July 23, 2024, while the finance minister, Ms Nirmala Sitharaman, proposed to hugely simplify and rationalise capital gain tax, she ended up hurting investor sentiments. Watch this video to learn about the changes made in the capital gain tax regime.

Short Term Capital Gain Tax has been increased on certain specified 'financial assets' such as stocks, and equity mutual funds, to 20% (from 15% earlier).

On 'other financial assets' and all 'non-financial assets', the union budget 2024-25 proposed that the short term capital gains continue to attract the applicable tax rate of the assessee - in other words as per one's income-tax slab (i.e. at the marginal rate of taxation).

Long Term Capital Tax on all 'financial assets' and 'non-financial assets', on the other hand, is proposed to be taxed at 12.5% (instead of 10%).

However, for the benefit of the lower and middle-income classes, the finance minister has proposed to increase the limit of exemption of capital gains on certain 'listed financial assets', such as stocks and equity mutual funds, to Rs 1.25 lakh per year from Rs 1 lakh.

Note, this exemption for LTCG does not apply to 'non-financial assets', such as property and gold.

In other words, the LTCG on 'non-financial assets' will now be taxed at a flat 12.5%, with no indexation benefit available. Thus, on the sale of property and gold, there will be no indexation benefit (which accounts for the inflation impact) available for the computation of LTCG.

Similarly, the listed financial assets such as the debt securities such as bonds, debentures, etc. will attract 12.5% LTCG tax (instead of 10% previously) without any indexation.

On the other hand, the unlisted bonds and debentures, debt mutual funds and market-linked debentures, irrespective of the holding period whether short term or long term, will be taxed at the income-tax rate applicable to the assessee.

So, the disparity between listed financial assets and unlisted ones continues to exist.

Ms. Sitharaman has stated that 'listed financial assets' held for more than a year will be classified as long term, while unlisted financial assets and all non-financial assets will have to be held for at least two years to be classified as long-term.

Apart from the above, the gains made from the buyback of shares will now no longer be exempt; they will be taxable like dividends as your income-tax slab.

The full budget proposals of the Modi 3.0 come into force with immediate effect. These hurdle rates would disappoint investors, plus impact the mood and momentum of the financial markets, including real estate and commodities.

In the past few years, particularly since the lows of the COVID-19 pandemic, significant savings have been channelised into the financial markets as reflected in the stupendous rise in demat accounts, mutual fund folios, and property registrations. This is due to simplified investment processes, the government's focus on financial inclusion, widespread adoption of smartphones, online low-cost investment platforms, rising income, and investors not wanting to miss the bus while traditional investment avenues offer lower returns.

Hence, increasing capital gain tax and removing the indexation benefit, is not expected to go well with investors even though it's been done so that investors stay invested rather than trade or engage in speculation.

The Modi 3.0 in its full budget for 2024-25, in my view, could have addressed simplification and rationalization of capital gain tax in a more meaningful way.

By proposing changes in this form, the government has only made computation of capital gain tax relatively simple. But, in my view, has missed the opportunity to truly rationalise and harmonise capital gains without hurting investor sentiments.

The increase in STT for the derivative segment of the market, however, is a welcome move given the irrational participation of even small investors.

Investors should approach every asset class thoughtfully in congruence with the asset allocation best suited for them and hold on to worthy investments until they realise their true potential and the envisioned financial goals are accomplished.

"In this world, nothing is certain but death and taxes." - Benjamin Franklin.

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