Budget 2024: How will capital gains tax tweaks impact taxpayers? Beneficial, says I-T department. Here’s the math

In the Union Budget 2024, presented by Finance Minister Nirmala Sitharaman on July 23, the tax rates for long-term capital gains (LTCG) and short-term capital gains (STCG) have been tweaked.

The changes include raising the tax rate on long-term capital gains on equity from 10 per cent to 12.5 per cent, while the tax rate on short-term capital gains on equity was hiked from 15 per cent to 20 per cent. Besides, exemption limit of ₹1 lakh on sale of equity has been raised to ₹1.25 lakh on LTCG.

Apart from this, what has come as a major blow to taxpayers is that the LTCG rate on all other assets has been slashed from 20 per cent to 12.5 per cent, while the indexation benefit has been phased out.

“The budget raised capital gains taxes (CGT) for listed securities, potentially discouraging some new retail investors. However, the increased Securities Transaction Tax (STT) on derivatives is positive,” said CA Paaras Gangwal, Founder of ThetaVega Capital.

Will it lead to higher or lower tax liability?

Well, with too many capital gains-related changes coming into force, that too with immediate effect, taxpayers are anxious about the impact on their tax liability.

The Income Tax (I-T) department has deconstructed the changes and asserted that these changes are beneficial in most cases.

Property bought 10 years ago

Suppose the purchase price of a property is ₹100, the annual returns range between 9 per cent and 15 per cent and the purchase year is 2014-15. In this case, the following would be the tax liability as per old and new tax rates:

(Source: Income Tax department)

As you can see from the above example, the new tax rate without indexation is beneficial in most cases. And in this particular example, when the property is held for 10 years, it is beneficial to taxpayers as the price has risen by 2.4 times or more.

Property bought 5 years ago

Suppose the purchase price is ₹100 and the annual returns range between 11 per cent and 20 per cent. The purchase year is 2019-20 (i.e., five years ago).

(Source: Income Tax department)

As the above illustration shows, the new regime is beneficial for the property held for five years as it has appreciated 1.7 times or more.

From the above examples, it is clear that only where returns are low (less than about 9-11 per cent per annum) that the earlier tax rate is beneficial but such low returns in real estate are unrealistic and rare.