Breakdown of the New Tax Rules for Stocks, Mutual Funds & More

Synopsis

• The indexation benefit abolished for properties bought after July 23, 2024.
  
  

• The exemption limit for the calculation of capital gains has been increased from ₹1 lakh to ₹1.25 lakh.
  
  

• The tax on short-term capital gains has been increased from 15% to 20%, and the tax on long-term capital gains has been raised from 10% to 12.5%. This applies to various listed and unlisted assets. 
  
  

• The shareholders will have to pay tax on the amount received after exercising a buyback offer. 
  
  

• Effective October 1, 2024, the Securities Transaction Tax (STT) on Futures & Options will be increased to curb speculation.
  
  

The Union Budget 2024, announced on July 23, 2024, has introduced significant changes to the taxation of various financial instruments. These changes will affect investors across different asset classes, including stocks, mutual funds, and real estate. These changes can impact your financial planning, and you may have to revisit your investment strategy to align it with the changes in the tax regime. Let's look at the key updates that could impact markets and what they mean for you as an investor.

What Are the New Changes in the Union Budget 2024

Let's break down the tax changes for various market instruments:

Note: The annual LTCG exemption limit increased from ₹1 lakh to ₹1.25 lakh for stocks and equity mutual funds.

Other notes:

• *Other than those investing 90% in equity ETFs

• **With indexation

• Those investing in funds with at least 65% equity
  
  
  

Budget 2024 Tax Changes and Their Impact on Investors

Changes in Long-Term Capital Gains (LTCG) Tax

What changed?

• The LTCG tax rate increased from 10% to 12.5% for most assets.
  
  

Example:

If you bought shares for ₹1,00,000 and sold them after 2 years for ₹1,50,000:

• Old tax: (₹50,000 - ₹1,00,000) * 10% = ₹4,000

• New tax: (₹50,000 - ₹1,25,000) * 12.5% = ₹3,125
  
  

Impact on investors

• Slightly higher taxes on long-term gains

• The increased exemption limit (₹1.25 lakh) provides some relief, especially for small investors
  
  
  

Changes in Short-Term Capital Gains (STCG) Tax

What changed?

• The STCG tax rate for equity increased from 15% to 20%.
  
  

Example:

If you bought shares for ₹1,00,000 and sold them after 6 months for ₹1,20,000:

• Old tax: ₹20,000 * 15% = ₹3,000

• New tax: ₹20,000 * 20% = ₹4,000
  
  

Impact on investors:

• Higher taxes for short-term equity investors

• May encourage longer holding periods
  
  
  

Changes in Real Estate Taxation

What changed?

• Indexation benefit removed for properties bought after July 23, 2024

• New option to choose between 12.5% tax without indexation or 20% with indexation for properties bought before July 23, 2024
  
  

Case 1: Property bought before July 23, 2024

Priya purchased a house in Mumbai in May 2015 for ₹80,00,000. In September 2024, she decides to sell the property for ₹1,60,00,000. Let's calculate her tax liability under both schemes, considering the ₹1.25 lakh exemption.

Old Scheme (20% with indexation):

1. Purchase year (2015-16) CII: 254
2. Sale year (2024-25) CII: 365 (assumed)
3. Indexed cost of acquisition: ₹80,00,000 × (365/254) = ₹1,14,96,063
4. Capital gains: ₹1,60,00,000 - ₹1,14,96,063 = ₹45,03,937
5. Taxable gains after exemption: ₹45,03,937 - ₹1,25,000 = ₹43,78,937
6. Tax at 20%: ₹43,78,937 × 20% = ₹8,75,787
   
   

New Scheme (12.5% without indexation):

1. Capital gains: ₹1,60,00,000 - ₹80,00,000 = ₹80,00,000
2. Taxable gains after exemption: ₹80,00,000 - ₹1,25,000 = ₹78,75,000
3. Tax at 12.5%: ₹78,75,000 × 12.5% = ₹9,84,375
   
   

In this case, Priya would still benefit from choosing the old scheme with indexation, as her tax liability would be ₹8,75,787, which is lower than the ₹9,84,375 she would pay under the new scheme.

Case 2: Property bought after July 23, 2024

Let's say Rahul purchases a house on August 1, 2024, for ₹1,00,00,000. He sells it in September 2028 for ₹1,50,00,000. Since the property was bought after July 23, 2024, only the new scheme (without indexation) applies.

Calculation under the new scheme (12.5% without indexation):

• Purchase price: ₹1,00,00,000

• Sale price: ₹1,50,00,000

• Capital gains: ₹1,50,00,000 - ₹1,00,00,000 = ₹50,00,000

• Taxable gains after exemption: ₹50,00,000 - ₹1,25,000 = ₹48,75,000

• Tax at 12.5%: ₹48,75,000 × 12.5% = ₹6,09,375

Rahul's tax liability would be ₹6,09,375.

Key points to note:

1. The ₹1.25 lakh exemption applies to both schemes, reducing the taxable capital gains.

2. For properties bought before July 23, 2024, investors can choose the more beneficial option between the old and new schemes.

3. Only the new scheme (12.5% without indexation) applies to properties bought after July 23, 2024, with ₹1.25 lakh exemption.

4. Removing indexation for properties bought after July 23, 2024, may result in higher tax liabilities, especially for long-term holdings in high-inflation periods.

You can choose the method that results in lower taxes.

Impact on investors:

• Potential for higher taxes on real estate gains

• More complex calculations but the flexibility to choose the most beneficial method before July 23, 2024 properties
  
  
  

Changes in ETFs and Mutual Funds

What changed?

• Standardised LTCG treatment for gold/silver ETFs and equity/hybrid Funds of Funds (FoFs)

• Some hybrid funds may face higher taxes due to the removal of indexation benefits
  
  

Impact on investors:
​​​​​​​

• Simplified tax structure for certain ETFs and FoFs

• Potential for higher taxes on some hybrid funds
  
  
  

Changes in Stock Trading and Derivatives

What changed?

• Securities Transaction Tax (STT) increased to 0.02% for futures and 0.1% for options

• Share buyback income is now treated as dividends

Example:

If you trade futures contracts worth ₹10 lakhs:

• Old STT: ₹10,00,000 * 0.01% = ₹100

• New STT: ₹10,00,000 * 0.02% = ₹200

Impact on investors:
​​​​​​​

• Higher costs for frequent traders

• Potentially higher taxes on buyback income, depending on the investor's tax slab

No Changes for Debt Fund Investors

Debt fund taxation remains unchanged, providing stability for these investors.

What steps can I take as an investor?

• Review your investment strategy: Reassess your portfolio in light of the new tax changes.
  
  

• Utilise the increased LTCG exemption: Take advantage of the ₹1.25 lakh exemption for stocks and equity mutual funds.
  
  

• Focus on long-term investing: Given the higher STCG rates, focus on longer holding periods where possible.
  
  

• Diversify your portfolio: Look into assets with more favourable tax treatments, such as equity mutual funds.
  
  

• Reassess real estate investments: Evaluate the new tax computation options for properties and plan transactions accordingly.
  
  

• Stay informed about market instruments: Keep track of changes in STT and buyback taxation for stocks and derivatives.
  
  

• Monitor your investment horizon: Align your investment durations with various assets' new holding period requirements.
  
  

• Evaluate the impact on your retirement planning: Assess how the changes affect your long-term financial objectives.
  
  

• Keep records: Maintain detailed records of your investments to accurately calculate and report capital gains.
  
  

By understanding these changes and taking appropriate steps, investors can adapt their strategies to minimise the impact of increased tax rates while working towards their financial objectives.

Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.