Capital Gains

Context (PIB): The Budget proposes that long-term gains on all financial and non-financial assets will attract a 12.5% tax rate, while short-term gains on certain financial assets will be taxed at 20%.

Amendments Proposed in Budget

• Classification of Assets:
  • Holding Periods: There will be only two holding periods:
    • For listed securities: 1 year
    • For all other assets: 2 years
  • The 36-month holding period has been removed.
• Listed Assets:
  • The holding period is now 1 year for all listed units of business trusts (REITs, InVITs), reduced from 36 months.
• Gold and Unlisted Securities:
  • The holding period is reduced from 36 months to 24 months.
• Immovable Property:
  • The holding period remains at 24 months.
• Taxation of Short-Term Capital Gains:
  • For listed equity shares, units of equity-oriented funds, and units of business trusts, the rate has increased from 15% to 20%.
• Indexation Benefit:
  • The indexation benefit on the sale of long-term assets has been removed.

Understanding Capital Gains

Short-Term Capital Gains (STCG)

• Definition: Gains from the transfer of short-term capital assets.
• Holding Period: An asset held for 12 months or less is classified as a short-term capital asset.

Long-Term Capital Gains (LTCG)

• Definition: Gains from the transfer of long-term capital assets.
• Holding Period:
  • An asset held for more than 24 months is a long-term capital asset. This includes unlisted shares, immovable property, bonds, debentures, and gold.
  • For listed securities, the holding period is 12 months.

Indexation

• Definition: Indexation adjusts the purchase price of an asset for inflation over the years. The adjusted price is then used to calculate capital gains, reducing the taxable amount.
• Current Change: The budget proposes to remove the indexation benefit previously available on the sale of long-term assets.