How is capital gains tax charged on the sale of financial assets including equity, mutual funds and debt? An explainer

If you are an active investor and often earn gains on the sale of your securities, bonds or mutual funds, you should be mindful of the tax rate that applies on these transactions. The gains accruing on the sale of assets is taxed under what is known as capital gains tax regime.

This could be ‘short term’ or ‘long term’ based on the time period for which the asset was held before being sold. Let us understand more on this here.

On July 23, 2024, the entire capital gains tax rate structure was revamped during Budget 2024. From the rate of tax to the exemption limit, the entire framework was tweaked in order to make it simpler for the taxpayers. As far as financial assets are concerned, the tax rate is quite similar to non-financial assets, however, the difference lies in the time period which determines whether it will be long term or short term capital gains.

With regards to financial assets, longer than ‘one year’ is considered long term, whereas in case of non-financial assets such as property or gold, this time period is ‘two years’.

Here we list out the current tax rates and time periods which apply to the sale of financial assets.

Capital gains tax: 6 Key things to  know

I. Rate on LTCG: Sale of financial assets such as equities attracts 12.5 percent tax when they are sold after holding for longer than a year. Even non-financial assets also face the same rate of capital gain tax.

II. Debt mutual funds: When someone sells unlisted bonds and debentures, debt mutual funds and market-linked debentures, the capital gains rate that kicks in is the applicable rate i.e., the rate of slab that the taxpayer falls under. This is regardless of the holding period.

III. Short term capital gains: When a financial asset is held for less than a year, the rate of tax will be 20 percent in case of certain assets which include STT paid listed equity, equity oriented mutual funds and units of business trust (section 111A).

IV. Exemption limit: The capital gains tax applies only above the exemption limit which is fixed at ₹1.25 lakh in a year.

V. Time period: The time period which determines whether an asset will attract a short term capital gain (STCG) or long term capital gain (LTCG) is one year in case of financial assets. This means when a financial asset is held for longer than one year, the rate of tax that applies is long term capital gain (LTCG). This does not apply to debt funds and unlisted bonds. Read point II. 

VI. Sale of gold: The rate of tax on sale of gold will be 12.5 percent when it is sold after holding for longer than two years. When sold before two years, the tax rate will be the slab rate.

Frequently Asked Questions (FAQs):

You sold shares you bought over 1 year ago. You have earned ₹1.5 lakh capital gain. What is the rate of tax?

Since there is an exemption limit of ₹1.25 lakh, the tax will apply on ₹25,000 (1.5 lakh - 1.25 lakh). The rate of tax will be 12.5 percent in this case.

You have sold equity mutual funds which you bought six months ago. What will be rate of capital gains tax?

This will attract 20 percent tax subject to the exemption limit of ₹1.25 lakh.

You have sold debt mutual funds you bought two years ago. What will be the capital gain tax rate?

This will attract the rate applicable as per your tax slab. If you fall under 10 percent tax bracket, the capital gains tax rate will also be 10 percent.

What were the key changes introduced in July 2024 with regards to capital gains?

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