The Finance (No. 2) Bill, 2024, has introduced several significant amendments to the capital gains tax regime in India. These changes aim to simplify and rationalize the taxation process, addressing holding periods, tax rates, and various asset treatments. This article provides an in-depth analysis of the proposed changes and their implications for taxpayers.
Key Changes in Capital Gains Taxation
1. Revised Holding Periods
The holding periods for determining whether a capital gain is short-term or long-term have been revised:
- Listed Securities: The holding period for listed securities has been reduced to 12 months, aligning it with the treatment of listed equity shares.
- Other Assets: For other assets, including bonds, debentures, and gold, the holding period has been reduced from 36 months to 24 months. The holding period for unlisted shares and immovable property remains at 24 months.
These changes are intended to simplify the holding period criteria and make the tax system more consistent. To incorporate such changes amendment has been brought to the definition of short-term capital asset contained in Section 2(42A), extracts of which is reproduced as under-
“(b) in clause (42A), with effect from the 23rd day of July, 2024,—
(i) in the opening portion, for the words “thirty-six months”, the words “twenty-four months” shall be substituted and shall be deemed to have been substituted;
(ii) in the first proviso,—
(A) the brackets and words “(other than a unit)” shall be omitted and shall be deemed to have been omitted;
(B) for the words “thirty-six months”, the words “twenty-four months” shall be substituted and shall be deemed to have been substituted;
(iii) in the second proviso, after the words “had been substituted”, the words, brackets, letters and figures “as it stood immediately prior to the commencement of the Finance (No.2) Act, 2024” shall be inserted and shall be deemed to have been inserted;
(iv) the third proviso shall be omitted and shall be deemed to have been omitted.”
2. Increase in Tax Rates for Short-Term Capital Gains
The tax rate for short-term capital gains on equity-related investments under Section 111A of the Income Tax Act has been increased from 15% to 20%. This adjustment addresses concerns that the previous rate was disproportionately benefiting high-net-worth individuals. Other short-term capital gains will continue to be taxed at the applicable income tax rates. To bring about such a change amendment has been made to Section 111A which is reproduced as under-
“In section 111A of the Income-tax Act, in sub-section (1) with effect from the 23rd day of July, 2024,—
(a) for the long line occurring before the first proviso, the following shall be substituted and shall be deemed to have been substituted with effect from the 23rd day of July, 2024, namely:—
“the tax payable by the assessee on the total income shall be the aggregate of—
(i) the amount of income-tax calculated on such short-term capital gains—
(a) at the rate of fifteen per cent. for any transfer which takes place before the 23rd day of July, 2024; and
(b) at the rate of twenty per cent. for any transfer which takes place on or after the 23rd day of July, 2024;
(ii) the amount of income-tax payable on the balance amount of the total income as if such balance amount were the total income of the assessee:”;
(b) in the first proviso, for the words “rate of fifteen per cent.”, the words, brackets and figure “rate as applicable in clause (i)” shall be substituted and shall be deemed to have been substituted.”
3. Tax-Free Limit for Long-Term Capital Gains
The tax-free limit for long-term capital gains on equity-related investments has been raised from ₹1 lakh to ₹1.25 lakhs. This increase provides additional relief to investors and aligns with inflationary trends.
4. Uniform Tax Rate for Long-Term Capital Gains
A uniform tax rate of 12.5% has been introduced for all categories of long-term capital gains. Previously, the rate was 10% for listed equity shares and 20% with indexation for other assets. This change simplifies the tax structure and ensures consistency across different asset classes.
Clause (i) of Sub-Section (2) of Section 112A has been substituted to bring about the above mentioned amendments and extracts of which are reproduced as under-
“(i) the amount of income-tax calculated on such long-term capital gains exceeding one lakh twenty-five thousand rupees—
(a) on long-term capital gains at the rate of ten per cent. for any transfer which takes place before the 23rd day of July, 2024; and
(b) on long-term capital gains, at the rate of twelve and one-half per cent. for any transfer which takes place on or after the 23rd day of July, 2024:
Provided that the limit of one lakh twenty-five thousand rupees shall apply on aggregate of the long-term capital gains under sub-clauses (a) and (b);”.
5. Removal of Indexation Benefits
The benefit of indexation, which allows adjusting the purchase price of an asset for inflation, has been removed for all long-term capital gains. This change simplifies the calculation of capital gains but may result in higher taxable gains for assets held over long periods. Amendments have been brought to Section 48 relevant extracts of which is reproduced as under-
“In section 48 of the Income-tax Act, in the second proviso, after the words “where long-term capital gain arises from the transfer”, the brackets, words, figures and letters “(which takes place before the 23rd day of July, 2024)” shall be inserted and shall be deemed to have been inserted with effect from the 23rd day of July, 2024.”
Further removal of Indexation benefit has necessitated changes in Section 112 extracts of which is reproduced as under-
“In section 112 of the Income-tax Act, in sub-section (1), for the clauses (a), (b), (c), (d) and the first proviso, the following shall be substituted and shall be deemed to have been substituted with effect from the 23rd day of July, 2024, namely:-
“(a) in the case of an individual or a Hindu undivided family, being a resident,—
(i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been his total income; and
(ii) the amount of income-tax calculated on such long-term capital gains,—
(A) at the rate of twenty per cent. for any transfer which takes place before the 23rd day of July, 2024;
and
(B) at the rate of twelve and one-half per cent. for any transfer which takes place on or after the 23rd day of July, 2024:
Provided that where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such long-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such long-term capital gains shall be computed at the rate as applicable in sub-clause (ii);
(b) in the case of a domestic company,—
(i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been its total income; and
(ii) the amount of income-tax calculated on such long-term capital gains,—
(A) at the rate of twenty per cent. for any transfer which takes place before the 23rd day of July, 2024;
and
(B) at the rate of twelve and one-half per cent. for any transfer which takes place on or after the 23rd day of July, 2024;
(c) in the case of a non-resident (not being a company) or a foreign company,—
(i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been its total income; and
(ii) the amount of income-tax calculated on such long-term capital gains, —
(A) at the rate of twenty per cent. for any transfer [other than a transfer referred to in sub-clause (iii)] which takes place before the 23rd day of July, 2024;
and
(B) at the rate of twelve and one-half per cent. for any transfer which takes place on or after the 23rd day of July, 2024;
(iii) the amount of income-tax on long-term capital gains arising from the transfer of a capital asset which takes place before the 23rd day of July, 2024, being unlisted securities or shares of a company not being a company in which the public are substantially interested, calculated at the rate of ten per cent. on the capital gains in respect of such asset as computed without giving effect to the first and second proviso to section 48;
(d) in any other case of a resident,—
(i) the amount of income-tax payable on the total income as reduced by the amount of long-term capital gains, had the total income as so reduced been its total income; and
(ii) the amount of income-tax calculated on such long-term capital gains,—
(A) at the rate of twenty per cent. for any transfer which takes place before the 23rd day of July, 2024;
and
(B) at the rate of twelve and one-half per cent. for any transfer which takes place on or after the 23rd day of July, 2024:
Provided that where the tax payable in respect of any income arising from the transfer of a long-term capital asset which takes place before the 23rd day of July, 2024, being listed securities (other than a unit) or zero coupon bond, exceeds ten per cent. of the amount of capital gains before giving effect to the provisions of the second proviso to section 48, then, such excess shall be ignored for the purpose of computing the tax payable by the assessee :”.
6. Alignment of Tax Treatment for Residents and Non-Residents
The tax treatment for capital gains has been aligned for both resident and non-resident taxpayers, ensuring a consistent approach and simplifying compliance.
7. Removal of parity between Unlisted debentures and bonds viz a viz Debt Mutual Fund-
Amendment to Section 50AA has been brought in to add Unlisted debentures and unlisted bonds so as to tax the same as Short Term Capital Gain. Further definition of specified Mutual Fund has been amended to remove ambiguity, extracts of same is reproduced as under-
“In section 50AA of the Income-tax Act,—
(a) for the portion beginning with the words “Notwithstanding anything contained in” and ending with the words “short-term capital asset:”, the following shall be substituted and shall be deemed to have been substituted with effect from the 23rd day of July, 2024, namely:—
“Notwithstanding anything contained in clause (42A) of section 2 or section 48, where the capital asset-
(a) is a unit of a Specified Mutual Fund acquired on or after the 1st day of April, 2023 or a Market Linked Debenture; or
(b) is an unlisted bond or an unlisted debenture which is transferred or redeemed or matures on or after the 23rd day of July, 2024, the full value of consideration received or accruing as a result of the transfer or redemption or maturity of such debenture or unit or bond as reduced by—
(i) the cost of acquisition of the debenture or unit or bond; and
(ii) the expenditure incurred wholly and exclusively in connection with such transfer or redemption or maturity, shall be deemed to be the capital gains arising from the transfer of a short-term capital asset:”;
(b) in the Explanation, for clause (ii), the following clause shall be substituted with effect from the 1st day of April, 2026, namely:—
‘(ii) “Specified Mutual Fund” means,—
(a) a Mutual Fund by whatever name called, which invests more than sixty-five per cent. of its total proceeds in debt and money market instruments; or
(b) a fund which invests sixty-five per cent. or more of its total proceeds in units of a fund referred to in sub-clause (a):
Provided that the percentage of investment in debt and money market instruments or in units of a fund, as the case may be, in respect of the Specified Mutual Fund, shall be computed with reference to the annual average of the daily closing figures:
Provided further that for the purposes of this clause, “debt and money market instruments” shall include any securities, by whatever name called, classified or regulated as debt and money market instruments by the Securities and Exchange Board of India.”
8. Change in manner of Taxation of Buy-Backs-
Memorandum to Finance Bill explains that the sum paid by a domestic company for purchase of its own shares shall be treated as dividend in the hands of shareholders, who received payment from such buy-back of shares and shall be charged to income-tax at applicable rates. No deduction for expenses shall be available against such dividend income while determining the income from other sources. The cost of acquisition of the shares which have been bought back would generate a capital loss in the hands of the shareholder as these assets have been extinguished. Therefore when the shareholder has any other capital gain from sale of shares or otherwise subsequently, he would be entitled to claim his original cost of acquisition of all the shares (i.e. the shares earlier bought back plus shares finally sold). It shall be computed as follows:
- (i) deeming value of consideration of shares under buy-back (for purposes of computing capital loss) as nil;
- (ii) allowing capital loss on buy-back, computed as value of consideration (nil) less cost of acquisition;
- (iii) allowing the carry forward of this as capital loss, which may subsequently be set-off against consideration received on sale and thereby reduce the capital gains to this extent.
Example :
- 100 shares bought in 2020 @Rs. 40/- per share. Total cost of acquisition Rs. 4000/-
- 20 shares bought back in 2024 @Rs. 60/- per share
- Income taxable as deemed dividend Rs. 1200/-
- Capital loss on such buyback (Rs. 40 *20) Rs. 800/-
- 50 Shares sold in 2025 @Rs. 70 per share
- Capital Gain (3500 – 2000) Rs. 1500 Chargeable capital gain after set off Rs. 700
Implications of the Changes
1. For Individual Taxpayers
- Higher Tax Liability for Short-Term Gains: Investors engaging in short-term trading of equity-related investments will face higher tax liabilities due to the increased rate.
- Simplified Tax Structure: The uniform tax rate for long-term gains and removal of indexation benefits simplify the tax calculation process.
- Increased Exemption Limit: The raised exemption limit for long-term gains provides additional relief to individual investors.
2. For Businesses and Start-Ups
- Adjusted Tax Strategies: Businesses may need to revisit their tax planning strategies to optimize liabilities, especially in light of the new uniform tax rate and holding periods.
- Simplified Compliance: The alignment of tax treatment for residents and non-residents simplifies compliance for businesses with international operations.
3. For the Economy
- Promotion of Long-Term Investment: The changes in holding periods and uniform tax rates are likely to encourage more stable, long-term investments, contributing to economic stability.
- Revenue Generation: The increased tax rates on short-term gains are expected to generate additional revenue for the government, aiding in fiscal consolidation efforts.
Conclusion
The Finance (No. 2) Bill, 2024, introduces comprehensive changes to the capital gains tax regime in India, aiming to simplify and rationalize the system. While the higher tax rates and removal of indexation benefits may pose challenges, the increased exemption limits and uniform tax rates provide significant relief and clarity. As these provisions come into effect, taxpayers must adapt their strategies to navigate the evolving tax landscape effectively, ensuring compliance while optimizing their tax liabilities.
