In the Union Budget 2024-25, Finance Minister Nirmala Sitharaman announced significant changes to the capital gains tax structure, which are poised to influence investor strategies and the broader financial market. Here’s a breakdown of the five most critical changes and their implications.
1. Increase in Short-Term Capital Gains Tax
The short-term capital gains tax (STCG) on certain assets has been raised from 15% to 20%. This hike is intended to discourage short-term trading and speculative investments. According to Sitharaman, “Short-term gains on certain financial assets shall henceforth attract a tax rate of 20 per cent, while that on all other financial assets and all non-financial assets shall continue to attract the applicable tax rate.”
2. Hike in Long-Term Capital Gains Tax
Long-term capital gains tax (LTCG) has been increased from 10% to 12.5% for all financial and non-financial assets. This move standardizes the tax rate across different asset classes but represents a 25% increase, which could shift investment preferences towards assets like gold and real estate.
3. Adjustment in Tax Exemption Limits
The long-term capital gains tax exemption limit has been raised from ₹1 lakh to ₹1.25 lakh per year. This adjustment aims to provide relief to lower and middle-income classes, ensuring that smaller investors are less affected by the increased tax rates.
4. Market Reactions and Expert Opinions
The stock markets reacted negatively to the budget announcements. On the day of the budget reveal, the Sensex dropped by 1.48%, and the Nifty 50 index fell nearly 2%. Major companies like Power Grid, Larsen and Toubro, Tata Motors, Tata Steel, and SBI saw significant declines. Experts believe these changes, although initially bearish, will lead to a more stable and mature investment environment. Shravan Shetty, Managing Director at Primus Partners, noted, “Increasing the long-term capital gain by 25 per cent to 12.5 per cent will lead to investments moving towards unproductive assets like gold and real estate.”
5. Encouragement for Long-Term Holdings
The widening gap between STCG and LTCG rates incentivizes longer-term holdings. Vaibhav Porwal, Co-founder of Dezerv, commented, “The increase in STCG and LTCG tax signals a significant shift. While the market’s initial reaction may seem bearish, we believe these changes will ultimately foster a more stable and mature investment environment.” Additionally, income from share buybacks will now be taxed as dividends, making buybacks less attractive and potentially increasing the attractiveness of regular dividends for shareholders.
Conclusion
The Union Budget 2024-25’s changes to capital gains taxes reflect a strategic shift to standardize taxation across asset classes and encourage long-term investments. While the initial market reaction has been negative, experts foresee a more stable and mature investment environment in the long run. These amendments aim to balance revenue generation for the government with fostering a more inclusive and equitable investment landscape.
