How Budget 2024 Changes Could Increase Your Capital Gains Tax on Stocks by 15%

In the recent Budget 2024 announcement, Finance Minister Nirmala Sitharaman introduced some significant changes to capital gains taxation. The budget proposes reducing tax rates for long-term capital gains to 12.5% across all asset categories and increasing the exemption limit for gains from listed equity shares, equity-oriented funds, and business trusts from Rs 1 lakh to Rs 1.25 lakhs. While these adjustments might initially seem favorable, a closer examination reveals potential complexities that could affect taxpayers differently.

Despite the seeming simplification, there are concerns that these changes may inadvertently increase the tax burden for many. Notably, the tax rate for short-term capital gains on listed equity shares, equity-oriented funds, and business trusts is set to rise from 15% to 20%. Additionally, the increase in the long-term capital gains tax by 2.5% on listed financial assets suggests a strategic move to boost direct tax revenues from the approximately 148 million demat accounts. This shift could overshadow the initial positive reception of the proposed tax adjustments.

Key Details of Capital Gains Tax Adjustments

The recent budget has introduced several key changes to capital gains taxation. Short-term gains from listed equity will now face a higher tax rate, increasing from 15% to 20%. This adjustment applies specifically to listed equity, equity-oriented funds, and business trusts, while tax rates for other financial and non-financial assets will remain unchanged.

For long-term capital gains, a new rate of 12.5% is proposed for all asset categories. This means a 2.5% increase for listed equity (up from the current 10%) and a 7.5% reduction for other assets such as house property and unlisted equity shares. Additionally, the budget proposes removing the indexation benefit for long-term capital gains across all assets, which could significantly affect tax calculations for investors.

Effects of Tax Changes on Stock Purchases

Recent revisions to tax rates for both long-term and short-term capital gains, along with changes to the Securities Transaction Tax (STT) on futures and options, aim to address high levels of market activity and encourage more sustainable growth in the stock market. These updates are likely to increase the tax burden for numerous investors.

Adhil Shetty from BankBazaar.com explains the implications: "Imagine you bought shares for Rs 8 lakh two years ago and sold them for Rs 12 lakh, resulting in a profit of Rs 4 lakh. Under the previous rules, long-term capital gains (LTCG) up to Rs 1 lakh were exempt from tax, with gains beyond that taxed at 10%. For a Rs 4 lakh gain, the tax applied to Rs 3 lakh (profit minus the exemption) was Rs 30,000."

Shetty further notes: "With the new regulations, the exemption threshold has been raised to Rs 1.25 lakh, but the tax rate has increased to 12.5%. Consequently, for the same Rs 4 lakh gain, the tax is now calculated on Rs 2.75 lakh (Rs 4 lakh minus Rs 1.25 lakh), resulting in a tax bill of Rs 34,375. This represents an additional Rs 4,375 in taxes, equating to nearly a 15% increase in tax liability. For a gain of Rs 10 lakh, the tax would rise from Rs 90,000 to Rs 1,09,375, marking an increase of Rs 19,375 or about 21.5%."

Minor Savings

The new exemption threshold offers some relief if your gains are below Rs 2.25 lakh. In such cases, the increased exemption counterbalances the higher tax rate. For instance, if your gains amount to Rs 2 lakh, the tax under the previous rule would have been Rs 10,000. With the new rule, the tax would be slightly lower at Rs 9,375, resulting in a modest saving of Rs 625.

Impact on Retirement Savings

Adhil Shetty highlighted that long-term capital gains (LTCG) tax affects substantial investments, such as those made for children's education or retirement savings.

"For substantial retirement corpuses, which can often reach into the crores, the tax implications can be significant. For example, on a gain of Rs 1 crore, the tax could amount to Rs 12.34 lakh. If you withdraw more than Rs 1.25 lakh in a year, this tax will apply, making it challenging to avoid it by staggering withdrawals. This could have major implications for your retirement planning, as you might need to increase your retirement corpus by 10-15% to cover these additional taxes," he explained.

Bottom Line

The Union Budget 2024 introduces significant tax adjustments aimed at moderating market activity and promoting sustainable growth. With increases in both long-term and short-term capital gains tax rates, and a higher Securities Transaction Tax on futures and options, investors should brace for a period of market recalibration. While these changes may initially raise the tax burden and require adjustments in investment strategies, they are designed to stabilize the market and ensure a balanced growth trajectory. As the financial landscape adapts to these new policies, the focus remains on fostering a robust and orderly capital market for the future.

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