Introduction

Understanding capital gains tax is crucial for investors and taxpayers. The Union Budget 2024 introduced significant changes to the taxation of capital gains, affecting both short-term and long-term investments. This guide will walk you through the key aspects of LTCG and STCG for FY 2024-25.

What are Capital Gains?

Capital gains are the profits earned from the sale of capital assets like stocks, bonds, property, and mutual funds. These gains are classified into two categories: Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG), based on the holding period of the asset.

Short-Term Capital Gains (STCG)

STCG refers to gains from the sale of an asset held for a period of less than 12 months. The tax rates for STCG are generally higher compared to LTCG:

• Listed Equity Shares and Equity-Oriented Mutual Funds: 20%
• Debt Instruments, Property, Jewellery, etc.: Based on the individual’s income tax slab rates.

Long-Term Capital Gains (LTCG)

LTCG refers to gains from the sale of an asset held for more than 12 months. The tax rates for LTCG are usually lower, and certain exemptions and benefits are available:

• Listed Equity Shares and Equity-Oriented Mutual Funds: 12.5%
• Other Financial and Non-Financial Assets: 12.5%

Types of Capital Assets

Capital gains can be incurred on various types of assets, including:

1. Equity Shares and Equity Mutual Funds: Held for less than 12 months (STCG) or more than 12 months (LTCG).
2. Debt Instruments (Bonds, Debentures): Held for less than 24 months (STCG) or more than 24 months (LTCG).

Immovable Property (Land, Building): Held for less than 24 months (STCG) or more than 24 months (LTCG).

Key Changes in Budget 2024

Budget 2024 introduced several changes to the capital gains tax regime:

1.     Holding Periods: The holding periods for STCG and LTCG have been standardized to 12 months and 24 months, respectively.

2.     Tax Rates: The tax rate for LTCG on listed securities has been increased from 10% to 12.5%. For other financial and non-financial assets, the tax rate has been reduced from 20% to 12.5%. And the Tax rate for STCG is not 20% which was earlier 15%.
New Tax Rate on capital gain is applicable from 23^rd July 2024 onwards.

3.     Indexation Benefit: The indexation benefit available on the transfer of other long-term assets has been removed.

4.     Exemption Limits: The exemption limit for LTCG on the transfer of equity shares or equity-oriented units has been increased from ₹1 lakh to ₹1.25 lakh per year.

LTCG Rates for NRIs

TDS Rates for NRIs:

Under Section 195 of the Income Tax Act:

1. Who Must Deduct TDS?
   • Any person responsible for paying an NRI for property transactions must deduct TDS.
2. Applicable TDS Rates:
   • 12.5% of the sale value for property transfers on or after July 23, 2024.
   • 20% of the sale value for transfers before July 23, 2024.
3. Basis of Deduction:
   • TDS is calculated on the entire sale value, regardless of actual capital gains.

Why the Confusion?

The confusion arises because:

Residents: They can choose between 12.5% without indexation or 20% with indexation after amendment.

NRIs: They don’t have this choice and must comply with the fixed LTCG rates after amendment. It also means that they can take indexation benefit if sold property before amendment i.e. on 23/07/2024.

Comparison of LTCG with and without Indexation as per Budget 2024:
Q : Example Calculation for LTCG:

     If a property is sold for  ₹10,00,000 during FY 2024-25 say on 28/07/2024    
     (After Amendment) and was purchased for ₹2,00,000 in June 2001, here’s
     how the tax would be computed: For Both case Residents and NRI’s


# With Indexation Benefit:

Option I-
Sale Consideration: Rs 10,00,000
Cost of Acquisition (Adjusted for Inflation): Rs 7,26,000 (calculated as Rs 2,00,000 multiplied by 363/100)
Long-Term Capital Gains (LTCG): Rs 2,74,000 (Sale Price Rs 10,00,000 minus adjusted cost of acquisition Rs 7,26,000)

     Tax: Rs 54,800 (20% of LTCG)

# Without Indexation Benefit:

Option II-
Sale Consideration: Rs 10,00,000
Cost of Acquisition: Rs 2,00,000 (original purchase price)
Long-Term Capital Gains (LTCG): Rs 8,00,000 (sale price Rs 10,00,000 minus original cost Rs 2,00,000)

·       Tax: Rs 1,00,000 (12.5% of LTCG)

In summary, opting for indexation results in a lower tax amount, but requires using a 20% rate. Conversely, without indexation, the tax is higher at a rate of 12.5%.
But this benefit is only available to Residents because only they have options to choose according to their benefits but In case of Non Resident Individuals he has to pay tax without indexation i.e at fixed rate.

Final Thoughts: Transparent Taxation for NRIs
The Finance (No. 2) Bill, 2024 has introduced clear rules for LTCG and TDS rates applicable to NRIs. By adhering to these new provisions, NRIs can ensure seamless compliance and avoid disputes during property transactions. Always consult a tax professional for personalized guidance based on your specific situation.