The Union Budget 2024 introduces significant changes to capital gains tax, including a uniform 12.5% tax rate on long-term gains for all assets, revised tax slabs, and removal of indexation benefits for unlisted shares. These amendments aim to simplify the tax structure, benefiting resident shareholders and Indian promoters, but may impact foreign investors’ returns.
Introduction
The Union Budget 2024, presented by Finance Minister Nirmala Sitharaman, brings about sweeping changes to the taxation of capital assets and capital gains. These amendments are designed to simplify the previously complex capital gains tax provisions and create parity across different asset classes and types of investors. Here are the five most significant changes in tax rules for investors.
1. Uniform 12.5% Tax Rate on Long-Term Capital Gains
One of the most notable changes is the introduction of a uniform 12.5% tax rate on long-term capital gains for all financial and non-financial assets. This change simplifies the tax regime by standardizing the rate across various assets. While this represents a 2.5% increase for listed shares, it significantly reduces the tax rate for other assets, such as real estate, from 20% to 12.5%.
2. Revised Tax Slabs and Holding Periods
The Finance Minister has adjusted the holding periods for all assets other than listed securities to a uniform 24 months for classification as long-term. This change aims to simplify the categorization of long-term and short-term gains, providing a clearer framework for investors. Additionally, short-term capital gains on the sale of listed equity shares, equity mutual funds, and units of business trusts have increased from 15% to 20%.
3. Impact on Foreign Investors and Private Equity
The amendments have mixed implications for foreign investors and private equity. While resident shareholders and Indian promoters stand to benefit from the sale of their unlisted businesses, foreign private equity investors may see their post-tax returns decline due to the 25% increase in the tax rate. The non-availability of indexation benefits on unlisted share sales may also impact the returns of longer-term investors such as Alternative Investment Funds (AIFs) and family offices.
4. Changes to Debt Instruments and Mutual Funds
The budget has introduced specific changes to the taxation of debt instruments and mutual funds. Unlisted bonds and debentures, debt mutual funds, and market-linked debentures will now attract capital gains tax at applicable rates, regardless of their holding period. Additionally, the definition of specified mutual funds has been refined to include those that invest more than 65% in debt and money market instruments, excluding exchange-traded funds, gold funds, and overseas equity funds from stringent taxation provisions.
5. Buyback of Shares Treated as Dividend
A significant change in the budget is the treatment of share buybacks akin to dividends, taxing the entire buyback proceeds in the hands of shareholders as dividend income. While this makes buybacks less attractive due to increased taxability, shareholders can offset and carry forward capital losses from the cost of shares. Beneficial tax rates under tax treaties on dividends should still be available to shareholders.
Conclusion
The amendments introduced in the Union Budget 2024 mark a significant step towards simplifying and rationalizing the capital gains tax structure in India. By standardizing rates and holding periods, and bringing parity across asset classes, the government aims to create a more efficient and equitable tax system. These changes are expected to benefit a broad spectrum of investors, fostering a more inclusive investment environment.
