Short-term capital gains tax applies to investments held for less than a year, while long-term capital gains tax applies to those held for more than a year.
The Union Budget 2024 introduced significant changes to capital gains tax rates, impacting both short-term and long-term capital gains from equity and equity-oriented mutual funds. The revamp of the capital gains tax regime will impact investment decisions and financial planning, ensuring a more balanced and fair approach to taxation.
What Has Changed?
Nirmala Sitharaman announced two changes to capital gains tax rates that will affect mutual fund investors’ earnings. She raised the long-term capital gains tax (LTCG) from 10% to 12.5% and the short-term capital gains tax (STCG) from 15% to 20%. However, there is a relaxation for mutual fund investors with a holding period exceeding one year: the exemption limit has been increased from Rs 1 lakh to Rs 1.25 lakh.
Short-term capital gains tax applies to mutual fund investments held for less than a year, while long-term capital gains tax applies to those held for more than a year.
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New Rules;
Short-Term Capital Gains (STCG):
- Previously taxed at 15%.
- Now taxed at a flat 20% irrespective of the income tax slab.
Long-Term Capital Gains (LTCG):
- Previously taxed at 10% with indexation benefits for gains exceeding Rs 1 lakh.
- Now taxed at a flat 12.5% without indexation benefits, with an exemption limit of Rs 1.25 lakh.
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Impact on Rs 5 Lakh Mutual Fund Earnings
Scenario 1: Short-Term Capital Gains
If the entire Rs 5 lakh is considered as short-term capital gains, the tax liability will be:
Before Budget 2024: 15% of Rs 5 lakh = Rs 75,000
After Budget 2024: 20% of Rs 5 lakh = Rs 1,00,000
Increase in tax liability: Rs 25,000
Scenario 2: Long-Term Capital Gains
Assuming the entire Rs 5 lakh is considered as long-term capital gains:
Before Budget 2024: Taxable income = Rs 5 lakh – Rs 1 lakh (exemption) = Rs 4 lakh.
Tax = 10% of Rs 4 lakh = Rs 40,000
After Budget 2024: Taxable income = Rs 5 lakh – Rs 1.25 lakh (exemption) = Rs 3.75 lakh.
Tax = 12.5% of Rs 3.75 lakh = Rs 46,875
Increase in tax liability: Rs 6,875
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Key Points to Remember
- The new tax regime is more straightforward but generally results in higher tax outgo.
- The holding period for equity-oriented mutual funds to qualify as long-term is still 12 months.
- Indexation benefits are no longer available for long-term capital gains.
- The exemption limit for long-term capital gains has been reduced.
It is essential to evaluate your specific financial situation and consider consulting with a tax professional to understand the implications of these changes on your overall tax liability.
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