Long Term Capital Gains (LTCG) is the tax imposed on profits deriving from selling assets like shares, mutual funds or real estate which you hold for a specific period before a sale. The taxation structure has undergone substantial changes post the 2024-25 Union Budget, from both asset classification as well as long-term capital gain tax rates. In this post, we discuss the changes and how they affect investors, including updated information on LTCG tax rates, short-term capital gains (STCG) and removal of indexation benefits.

LTCG occurs as a result of selling the capital asset such as equity shares, mutual funds or real estate after holding it for a specified period if the gains are more than Rs. 1.25 lakh. Post the Union Budget 2024-25 assets are now classified into two categories of holding periods: at 12 months and at 24 months, removing the prior classification of 36 months.

Equities and equity-oriented mutual funds are considered long-term investments if the holding period is over 12 months. Assets that are sold within 12 months are now considered short-term. The LTCG tax rate on equity investments is 12.5%, with no indexation benefit. This is a change from the earlier regime where the first Rs. 1 lakh of profit was exempt and you could use indexation to adjust for inflation.

• The holding period, for various classes of assets, has been modified into two categories, 12 months and 24 months after the Union Budget 2024-25.
• The tax on Short-Term Capital Gains (STCG) for equities held for under a year is now 20%, up from the previous rate of 15%.
• LTCG are taxed at 12.5% for any gains above Rs. 1.25 lakh, with the indexation benefit having been removed
• This will now make long-term equity-oriented funds less tax-efficient than they were before, forcing a rethink on the investment strategies.

LTCG tax rate on equities and equity-oriented mutual funds has been raised to 12.5% with the Union Budget 2024-25, while indexation benefits have been done away with. This prevents investors from inflating the purchase price of their assets, resulting in an increased tax burden. Moreover, assets like real estate and debt funds will now be considered long-term if they are held over 24 months as opposed to the old threshold which used to be 36 months.
 

Say, for example, Rs. 40 lakh have been invested in equity funds in the year 2020. Now in 2024, the funds have a collective value of Rs. 55 lakh. Let’s see how the LTCG tax payable has changed before and after the Union Budget 2024 changes.
 

LTCG tax calculation formula = Gains (minus) exemption amount * rate of tax
 

Using this scenario and the above formula, gains would calculate to Rs. 55 lakh (minus) Rs. 40 lakh = Rs. 15 lakh
 

Previous LTCG @10% (Exemption – Rs 1 lakh) - Regulation Before Union Budget 2024
 

(Gains – Rs.1 lakh)*10%. Rs.15,00,000 – Rs.1,00,000)*10% = Rs. 14,00,000*10% = Rs. 1,40,000

Applying the New LTCG tax rate @ 12.5% - Exemption of Rs. 1.25 lakh - Regulation After Union Budget 2024
 

(Gains – Rs. 1.25 lakh)*12.5% (Rs. 15,00,000 – 1,25,000)*12.5% = 13,75,000*12.5% = Rs. 1,71,875

Long-term capital gains are any gain on an asset you have held for more than a year and short-term capital gains are assets that you buy then sell within a year.

Short-Term Capital Gains (STCG): Stocks owned for less than a year or 12 months are short-term. In the 2024-25 Union Budget, tax on STCG for listed equity shares and equity-oriented mutual funds or units of business trusts has been hiked from 15% to 20%.
 

Long Term Capital Gains (LTCG): Equities that are held over 12 months receive an LTCG tax rate of 12.5% with no indexation benefit. The tax exemption amount has also been revised to Rs. 1.25 lakhs.

The Union Budget 2024-25 brought many changes in the capital gains tax system, with the STCG rate being increased to 20% and the LTCG rate to 12.5%. Indexation benefits have been done away with but the tax exemption limit has now risen to Rs. 1.25 lakh, offering some relief for investors. These updates require a strategic investment planning approach for long-term investors.
 

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