Capital Gains Tax 2024: Finance minister Nirmala Sitharaman in the Union Budget unveiled a hike in the tax rates on Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG) pertaining to equity-oriented funds. Key changes include the elevation of STCG tax on equity mutual funds to 20% from the prevailing rate of 15%, and the adjustment of LTCG tax to 12.5 per cent from the earlier rate of 10 per cent on equity funds. Furthermore, Nirmala Sitharaman indicated a raise in the exemption threshold for LTCG tax to Rs 1.25 lakh from the existing Rs 1 lakh within a financial year.
It is essential to note that each installment of a SIP is to be treated as an individual investment for tax assessment purposes. This entails that if an individual allocates Rs 20,000 into an equity mutual fund through SIPs, each installment will be evaluated separately to ascertain the holding period and the applicable tax rate.
After July 23, 2024, equity mutual funds and shares held for a period of 12 months or less will still be subjected to a 20% tax rate for short-term capital gains (STCG). Conversely, for long-term capital gains (LTCG), the tax rate will remain at 12.5%.
Due to the recent increase in Long-Term Capital Gains (LTCG) tax rates from 10% to 12.5%, long-term investors may experience a slight uptick in their tax obligations. However, small investors stand to benefit from the raised exemption limit to Rs 1.25 lakh. On the other hand, the rise in Short-Term Capital Gains (STCG) tax rates to 20% will have an impact on short-term equity investors.
What should be your investment plan now?
As per the Budget, mutual funds investing more than 65% of total proceeds in debt and money market instruments will be covered under Section 50AA. This implies that exchange-traded Funds (ETFs), Gold Mutual Funds, and Gold ETFs will not be considered specified mutual funds.
Equity-oriented funds, which primarily invest in stocks, continue to be an attractive option for long-term wealth creation. One of the key advantages of these funds is the potential tax benefits they offer to investors. On the other hand, debt funds, which focus on fixed-income securities, have seen a decrease in their appeal in recent times.
“The recent tweak in capital gains taxation indicates that the government is moving forward to simplify/rationalise capital gains taxation. In part of that, the government tinkered with a marginal increase in LTCG from 10% to 12.5%, and long-term investors might be paying slightly higher taxes. However, with the exemption limit raised to Rs 1.25 lakh, small investors will see modest benefits. The increase of STCG from 15% to 20% will impact short-term equity investors. Although the tax rates are marginally increased, equity mutual funds remain an attractive investment opportunity compared to other asset classes. If you are making a gain of 1 crore in LTCG before tax weak, your tax outflow would be 11.9 lakhs & post tax tweak would be 14.8 lakh, which is 2.9 lakhs higher, and this is inclusive of cess & surcharge,” said Hrishikesh Palve, Director, Anand Rathi Wealth Limited.
Palve added: “The investors who have an exposure of more than 80 to 90% in equity no need to worry much or rebalance their portfolio based on the recent tax tweak in the union budget, but investors with high exposure in gold or real estate should consider rebalancing their allocation to high exposure in equity class. Investors should follow the asset allocation based on their goal requirements. If they are investing for medium-term goals (3 to 5 years), the ideal asset allocation would be 70:30 in equity & debt to expect a return of 12%, if for a long-term (more than 5 years) can consider asset allocation of 80:20 in equity & debt to expect a return of 13% in the long-term.”
“The overall intent of this budget has been to bring most of the investment asset classes and products at par from a taxation perspective. Accordingly, the long-term capital gains tax rate has been kept uniform across all asset classes and products. The only difference is in terms of holding period for an investment to qualify for long-term capital gains. This, in my opinion, is a great development from an investor’s perspective as the influence of taxation reduces significantly while making investment decisions. Investors can now make investment decisions purely based on the potential risk / reward of each asset class or product category and how it fits in their portfolio basis their investment objective, investment horizon and risk tolerance. Despite the marginal increase in long-term capital gains tax rate in equity mutual funds from 10% to 12.5%, they continue to be best suited for long-term wealth creation,” said Nilesh D Naik, Head of Investment Products, Share.Market.
Naik explained: “The parity in long-term capital gains taxation across products also provides a more tax-efficient opportunity for investors to achieve diversification across geographies and asset classes by investing in product categories such as overseas funds and gold funds. The only exception to this is the debt funds category where the taxation is based on the slab rate. Investors who have debt fund investments that were made prior to 1st April 2023 would be better off to continue with such investments (provided it aligns with their overall asset allocation requirement) as gains on such investment will continue to qualify as long term capital gains and be taxed at 12.5% if held for over 24 months.”
“Post-budget, the investment landscape has shifted. Equity-oriented funds remain attractive for long-term wealth creation due to potential tax benefits. However, debt funds have become less appealing due to the removal of indexation benefits. Investors should carefully evaluate their risk tolerance and investment horizon before making decisions. A balanced approach, considering both equity and debt, might be prudent. Investors might refrain from making long-term investments in real estate after the removal of indexation benefits in tangible assets as well,” suggested Sonam Srivastava, Founder and Fund Manager at Wright Research.
In the Budget, according to a Fisdom Research report, the finance minister announced significant allocations to various sectors. These include Rs 1.52 lakh crore for agriculture and allied sectors, Rs 4.54 lakh crore for the Defence sector, and Rs 26,000 crore for the infrastructure sector. Following these budget allocations, sectors or trends may experience an upturn in performance, leading mutual fund investors to consider theme-based mutual funds tailored to these sectors.
Naik added: “When it comes to mutual fund investing, it’s important to take a long-term view and invest based on a proper investment plan aligned with your overall investment objectives and risk tolerance. While events such as this create a lot of excitement among investors, one doesn’t necessarily need to react to every news. Good investing is often boring. For most investors, there may not be a real need to have sectoral or thematic funds in their portfolios to achieve their long-term financial goals. Moreover, if a particular sector or theme is poised to do well, then nothing stops the diversified funds from being flexible to increase allocation to it and yet provide the benefit of necessary diversification required in the fund’s portfolio.”