In the first Budget of Modi 3.0, the simplification and rationalization of the Capital Gains Tax was one of the key focus areas.

Finance Minister Nirmala Sitharaman proposed that the short term gains on certain financial assets shall attract a tax rate of 20%, while that on all other financial assets and all non-financial assets shall continue to attract the applicable tax rate.

She also proposed that the long term gains on all financial and non-financial assets will attract a tax rate of 12.5%. For the benefit of the lower and middle-income classes, she proposed to increase the limit of exemption of capital gains on certain financial assets from ₹ 1 lakh to ₹ 1.25 lakh per year.

What does this mean?

If we decode the Budget document thoroughly, there will only be 2 holding periods: 12 months for listed securities, and 24 months for all other securities to determine short term and long term capital gains.

Importantly, in the Budget, the government has reduced the holding period for bonds and debt mutual funds for being classified as long term from 36 months to 24 months.

The short-term capital gains (STCG) tax for listed equity securities has been increased from 15% to 20% while the long-term capital gains (LTCG) tax for listed equity securities has been increased from 10% to 12.5% with exemption of initial 1.25 L gain.

Some market participants are reading the capital gains tax hike as a signal that, directionally, the government would want to do away with any preferential tax treatment for equity markets.

More importantly, it is arguably a signal from the finance minister that equity market investments should not be prioritised over private capex.

Brace for more tax liability while selling property

Under the new arrangement, the rate for LTCG for other securities, non-listed, has reduced from 20%, with indexation, to 12.5%.

The Government said that this will be a big impetus to sale of immovable properties as long term capital gains tax would significantly reduce.

But the budget fine print revealed that the indexation benefit on real estate has been revoked, sparking concerns that it may result in higher tax outflows for sellers.

The indexation benefit previously allowed sellers to adjust the purchase price of their property for inflation, reducing their taxable capital gains. With this benefit now removed, sellers will face higher tax liabilities.

Previously, long-term capital gains (LTCG) from property sales were taxed at 10% with the indexation benefit. The new Budget documents indicate that the tax rate for LTCG on property sales will increase to 12.5% without the indexation benefit.

Under the previous taxation rules, taxpayers could adjust the purchase price using the Cost Inflation Index (CII) numbers specified by the Income Tax Department.

With the new rule in effect, the purchase price will no longer be adjusted for inflation, leading to a higher taxable capital gain and increased tax liability.