Investors hoping for relief from capital gains tax have a fresh reason to watch the next Union Budget. A proposal by SBI Research to abolish long-term capital gains (LTCG) tax on equities, coupled with Finance Minister Nirmala Sitharaman's willingness to hear investors' concerns, has brought the contentious levy back into focus.
Speaking in New Delhi on Tuesday, October 13, Sitharaman acknowledged the debate surrounding LTCG tax and securities transaction tax (STT). However, she stopped short of promising any changes, saying it was too early to make commitments ahead of the Budget.
The discussion comes at a time when foreign investor outflows have put pressure on Indian equities. Supporters of removing LTCG tax argue that it could make Indian markets more attractive to investors and encourage long-term participation.
For retail investors, however, the immediate question is how much tax they currently pay when selling shares, mutual funds, property or gold.
Long-term capital gains tax is levied on profits earned from selling capital assets held beyond a specified period. The holding period varies depending on the investment.
The Union Budget 2024 substantially revised capital gains taxation, increasing the LTCG rate on qualifying equity investments from 10% to 12.5%, while raising the annual tax-free threshold from ₹1 lakh to ₹1.25 lakh.
The revised provisions took effect on July 23, 2024.
Under the current framework, the broad rules for common investments are:
Listed equity shares: Gains exceeding ₹1.25 lakh in a financial year are taxed at 12.5%, subject to Section 112A conditions.
Equity-oriented mutual funds: Qualifying long-term gains above the annual ₹1.25 lakh threshold attract 12.5% tax.
Property: Long-term gains are generally taxed at 12.5% without indexation, with transitional relief for certain older properties.
Gold: Long-term gains generally attract 12.5% tax without indexation.
Other capital assets: The 12.5% rate generally applies to qualifying long-term gains, subject to asset-specific provisions.
These rates exclude applicable surcharge and cess. Certain investments, including specified debt mutual funds, are governed by separate tax rules.
One important benefit for equity investors is the annual ₹1.25 lakh exemption under Section 112A.
The exemption applies to the combined eligible long-term capital gains from listed equity shares, equity-oriented mutual funds and business trust units during a financial year.
It applies to profits, not the total amount received from selling investments. Consider an investor who earns ₹2 lakh in eligible long-term equity gains during a financial year.
Illustration: Tax on ₹2 lakh equity LTCG
Long-term capital gains: ₹2,00,000
Annual exemption: ₹1,25,000
Taxable gains: ₹75,000
Tax at 12.5%: ₹9,375
Illustrative calculation before applicable cess and surcharge, assuming the gains qualify under Section 112A.
An investor making eligible long-term equity gains of ₹1 lakh during the financial year would generally have no LTCG tax liability on those gains.
However, the exemption is an aggregate annual limit, not a separate allowance for each stock or mutual fund investment.
The holding period determines whether a profit is classified as a short-term or long-term capital gain.
For listed equity shares and equity-oriented mutual funds, investments generally need to be held for more than 12 months to qualify for long-term capital gains treatment.
For immovable property and unlisted shares, the holding period is generally more than 24 months.
Investments sold before completing the applicable holding period may attract short-term capital gains tax, which follows different rules.
Property owners were among those significantly affected by the capital gains tax changes introduced in 2024.
Previously, long-term gains from property sales were generally taxed at 20% with indexation benefits. Indexation allowed sellers to adjust the acquisition cost for inflation, potentially reducing taxable profits.
The new framework introduced a 12.5% rate without indexation for most long-term property transactions.
However, transitional protection is available to resident individuals and Hindu Undivided Families selling land or buildings acquired before July 23, 2024.
Where eligible, sellers can compare the tax calculated under the new 12.5% system with the tax calculated under the earlier 20% system with indexation. If the earlier method produces a lower tax liability, the transitional provision provides relief, subject to the statutory conditions.
Eligible property sellers may also claim exemptions under provisions such as Sections 54, 54F and 54EC, provided they meet the relevant reinvestment requirements.
The debate over LTCG tax has intensified amid concerns about India's attractiveness to foreign portfolio investors. SBI Research has reportedly recommended abolishing LTCG tax on equities to encourage investment and improve capital flows.
Another concern is the combination of LTCG tax and STT. Investors pay STT on certain securities transactions, while capital gains tax applies to taxable profits realised from those investments. Some market participants argue that the combined burden increases the cost of investing in Indian equities.
Sitharaman's October 13 remarks indicate that the government is prepared to consider investor concerns during Budget consultations, but they do not amount to a commitment to reduce or remove either tax.
With the next Union Budget approaching, investors will be watching whether the government proposes changes to LTCG tax, STT or the broader capital gains framework.
For now, three points matter:
The 12.5% LTCG rate continues to apply to eligible equity gains exceeding ₹1.25 lakh annually.
Any future exemption or abolition of equity LTCG tax would not automatically extend to property, gold or other assets.
Investors should calculate tax liabilities under the existing rules until any proposed changes become law.
The debate may continue in the coming months, but there is no announced decision to abolish LTCG tax. For investors planning to sell shares or other assets, the existing tax treatment remains the basis for financial decisions.