Capital Gains Tax Changes How They Could Affect Your Investments

April 5, 2025

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Sneha is an employed worker who has been investing in the stock market for many years. Like many other Indian investors, she is eager to see how recent capital gains tax changes could impact her investment plan. The new financial year, beginning April 1, 2025, brings with it a series of tax measures that have been implemented the previous year but continue to shape the investment landscape.

Let us explore what capital gains tax is, their changes, how it is calculated and how they are beneficial for investors.

What is Capital Gains Tax?

Capital gains tax is imposed on any amount you gain from the sale of capital assets, including stocks, bonds, real estate, and other investments. It is imposed on the difference between the purchase price of the asset (cost basis) and the sale price.

A capital gain occurs when you sell an asset for more than you paid for it. Conversely, you incur a capital loss when you sell an asset for less than what you purchased it for. In most cases, capital gains tax is only applied to capital gains and not to the full amount received from the sale.

Recent Changes in Capital Gains Tax

The Union Budget 2024 introduced significant modifications to India’s capital gains tax framework:

• Uniform Long-Term Capital Gains (LTCG) Tax Rate: A flat LTCG tax rate of 12.5% now applies across various asset classes.

• Removal of Indexation Benefits: Indexation, which adjusted an asset’s purchase price for inflation to reduce taxable gains, has been eliminated for most asset classes.

• Revised Holding Periods:

o Listed securities qualify as long-term assets after 12 months.

o Other capital assets, such as unlisted shares and real estate, require a holding period of 24 months to qualify for LTCG treatment.

• Higher Short-Term Capital Gains (STCG) Tax Rate: The STCG tax rate on equity investments has increased from 15% to 20%.

How Capital Gain Tax Is Calculated?

To understand the impact of these changes, let’s consider an example.

Example:

Sneha purchased shares in April 2021 for ₹4,00,000 and sold them in July 2024 for ₹8,00,000. Her profit is ₹4,00,000.

Under the new tax regime:

• Since she held the shares for more than 12 months, LTCG tax applies.

• The ₹1.25 lakh exemption limit applies, meaning only ₹2,75,000 (₹4,00,000 - ₹1,25,000) is taxable.

• LTCG tax is calculated as 12.5% of ₹2,75,000 = ₹34,375.

Tax on Capital Gains from Debt Funds

Capital gains from debt funds are profits generated from selling mutual fund units primarily invested in fixed-income securities such as corporate bonds and government securities.

• For investments made before April 1, 2023:

o Short-Term Capital Gains (STCG): Units held for less than 36 months are taxed at the investor’s income tax slab rate.

o Long-Term Capital Gains (LTCG): Units held for more than 36 months previously benefited from indexation and were taxed at 20%.

• For investments made after April 1, 2023:

o Debt mutual funds purchased on or after April 1, 2023, are taxed as short-term capital gains, regardless of the holding period. They are no longer eligible for long-term capital gains (LTCG) benefits or indexation. Instead, gains from these funds are added to the investor’s income and taxed as per the applicable income tax slab rates.

Pros and Cons of the Capital Gains Tax Changes

Benefits:

1. Simplified Tax Structure: The consistent Capital Gain tax rate simplifies the tax structure, so investors can more easily understand and manage their investments. Thanks to this clarity, investors might focus on strategies rather than complicated tax rules, which also makes better financial preparation easier.

2. Higher Exemption Limit: By lowering their tax burden, small investors will benefit from the increase in the Capital Gain exemption limit for equity-related investments to Rs. 1.25 lakh. Encouraging more people to invest in the stock market promotes financial inclusion and, through greater participation, economic growth.

3. Reduced Litigation: The streamlined holding periods and tax rates diminish disagreements and litigation concerning the taxation of capital gains. This clarity provides greater certainty to taxpayers and keeps them from legal disputes that take time and resources away from investment decisions and optimising their portfolios, leading to better management of their financial affairs.

4. Consistency Across Asset Classes: The uniform tax rate creates a systematic and equal approach across all asset classes, free from biases, and establishes a playing field. This uniformity allows investors to make investment decisions based on the underlying performance of the asset rather than tax impact.

5. Greater Transparency and Clarity for Investors: The new regime affords transparency in tax rates and the holding periods on the investments, which provides investors with the ability to make informed decisions around investments. Transparency helps maximise portfolio performance and manage tax costs, as well as aligns an investment plan with individual financial goals, and therefore increases overall investing success.

Disadvantages:

1. Higher Tax Burden on Some Investors: The removal of indexation benefits increases the taxable portion of gains, especially for long-term investments like real estate and debt funds.

2. Increased STCG Rate on Equities: Traders and short-term investors may face higher taxes due to the STCG rate hike from 15% to 20%.

3. Less Tax-Efficient for Debt Funds: Debt fund investors who previously benefited from indexation may find the new tax structure less favourable.

Conclusion

India’s capital gains tax reform seeks to streamline and create a stable tax structure for various asset classes. While tax liability may be increased for some investors by the removal of indexation benefits, these changes present multiple benefits, such as a simpler tax structure along with larger exemption limits. While Sneha and other investors come to grips with the changes, it is important to keep in mind how these reforms may affect one’s planning and investment strategies. Changes in capital gains treatment on investment reform provide the possibility for informed decision-making and tax-efficient investing for the upcoming financial year.

-Sukalyan Halder & Marifur Rahaman

-Dayco India

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Capital Gains Tax Changes How They Could Affect Your Investments

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