Union Finance Minister Nirmala Sitharaman has announced significant changes to the capital gains tax rates. These changes will affect both short-term and long-term capital gains on certain equity investments.
Increase in Short-Term Capital Gains Tax
If you plan to sell your equity investments within 12 months, be prepared for higher taxes. The short-term capital gains (STCG) tax on some assets will increase from the current 15% to 20%. This change applies to equity shares, units of equity-oriented mutual funds, and units of business trusts where Securities Transaction Tax (STT) is paid.
“The rate for short-term capital gain under provisions of section 111A of the Act on STT paid equity shares, units of equity-oriented mutual funds, and units of a business trust is proposed to be increased to 20% from the present rate of 15% as the present rate is too low and the benefit from such a low rate is flowing largely to high net worth individuals,” Sitharaman explained.
Long-Term Capital Gains Tax Hike
The long-term capital gains (LTCG) tax has also been increased. Previously, the rate was 10%, but it will now be 12.5%. Additionally, the exemption limit for long-term capital gains tax has been raised from Rs 1 lakh to Rs 1.25 lakh.
Classification of Financial Assets
Listed financial assets held for more than a year will be considered long-term. However, unlisted financial assets and all non-financial assets need to be held for at least two years to be classified as long-term.
Tax on Unlisted Assets and Debentures
Sitharaman noted that unlisted bonds, debentures, debt mutual funds, and market-linked debentures will attract tax on capital gains at the applicable rates, regardless of the holding period.
Increase in Securities Transaction Tax
The budget also proposes an increase in the Securities Transaction Tax (STT). The STT rate on the sale of options in securities will rise from 0.0625% to 0.1% of the option premium. For the sale of futures in securities, the rate will increase from 0.0125% to 0.02% of the price at which such futures are traded.
These tax changes are part of the government’s efforts to ensure a fair distribution of tax benefits and to address concerns that the current tax rates favor high net worth individuals. Investors need to be aware of these new rates and plan their investments accordingly.
