The Indian government’s Union Budget for 2024 has introduced pivotal amendments to capital gains taxation, aimed at simplifying the tax regime while making strategic adjustments to benefit certain classes of taxpayers. These changes will have a broad impact on individual investors, property owners, and businesses alike. In this blog, we will break down the key amendments, explain their potential effects, and provide insights into how they can influence financial planning.

1. Reduction of Long-Term Capital Gains (LTCG) Tax Rate

One of the headline amendments in Budget 2024 is the reduction of the LTCG tax rate from 20% to 12.5%, effective from July 23, 2024. This reduction applies to gains on assets such as real estate and other long-term holdings. This new, lower rate is aimed at making long-term investments more attractive by reducing the overall tax burden for investors.

2. Abolition of Indexation Benefits

A major shift in the capital gains tax framework is the removal of indexation benefits for assets acquired after July 23, 2024. Previously, indexation adjusted the purchase cost of an asset to account for inflation, thereby reducing the taxable capital gains. With this benefit no longer available, especially for real estate, investors may see an increase in their tax liabilities​.

To illustrate the change, consider a property purchased for ₹30 lakh in 2003 and sold for ₹1.5 crore in 2024. Under the old regime, indexation would have increased the cost base to ₹95.78 lakh, resulting in a capital gain of ₹54.22 lakh and a tax liability of ₹10.84 lakh. Under the new regime, without indexation, the entire difference between the purchase price and sale price—₹1.2 crore—would be taxed at 12.5%, resulting in a tax liability of ₹15 lakh​.

3. LTCG Exemption Limit Raised.

To balance the removal of indexation, the government has raised the LTCG exemption limit from ₹1 lakh to ₹1.25 lakh. This provides some relief, particularly for smaller investors, by increasing the threshold below which no capital gains tax is levied. While the increase is modest, it aligns with the government’s goal of promoting long-term investments​.

4. IMPACT ON REAL-ESTATE TRANSACTION

The removal of indexation has sparked sizable dialogue, especially within the real estate sector, that's quite touchy to inflationary trends. Investors who hold belongings for lengthy durations may want to locate themselves going through a better tax burden because of the shortage of indexation. However, the 12.5% LTCG rate should benefit the ones who have purchased homes greater lately, where inflation adjustment is less essential.

For instance, if a property was bought in 2018 for ₹80 lakh and sold for ₹1.5 crore in 2024, the taxable gain under the old regime would have been ₹50.57 lakh after indexation, attracting a tax liability of ₹10.11 lakh. In contrast, under the new rules, the taxable gain would be ₹70 lakh without indexation, but the tax rate is only 12.5%, resulting in a tax of ₹8.75 lakh—lower than under the previous regime.

5. Special Provisions for Pre-2024 Acquisitions

To cushion the impact on individuals who purchased assets before the new rules come into effect, the budget includes a provision that allows taxpayers to choose between the old and new tax regimes. If an individual finds that the new regime (12.5% without indexation) results in a higher tax burden than the old regime (20% with indexation), the excess amount will be ignored​.This provides some flexibility for long-term investors who might otherwise be disadvantaged by the removal of indexation.

6. Abolition of Angel tax

In a flow that has been welcomed by the startup surroundings, Budget 2024 abolished Angel Tax throughout all categories of taxpayers. This tax have been levied on investments in unlisted groups, consisting of startups, and its removal is predicted to beautify the benefit of attracting funding for early-stage ventures.

7. No TDS on Mutual fund Withdrawals

For mutual fund investors, another significant change is the removal of Tax Deducted at Source (TDS) on withdrawals. Previously, a 20% TDS was levied on the sale or repurchase of mutual fund units, which complicated liquidity for investors. This change is expected to simplify the taxation process for mutual funds and make it easier for investors to access their funds​.

Conclusion

The capital gains tax amendments in Budget 2024 represent a fundamental shift in how long-term investments, particularly in real estate, will be taxed in India. The reduction in the LTCG rate to 12.5%, coupled with the abolition of indexation benefits, will have varying impacts depending on the type of asset and the length of time it has been held. While smaller investors may benefit from the raised exemption limit and lower tax rate, long-term property holders might face increased tax liabilities. Careful tax planning will be essential in navigating these changes.

For real estate investors, especially those with assets purchased prior to July 2024, the ability to choose between the old and new tax regimes provides a much-needed buffer. Meanwhile, the removal of Angel Tax and TDS on mutual funds will simplify financial operations for startups and mutual fund investors, respectively.

These changes will take effect in the financial year 2024-25, making it crucial for taxpayers to reassess their investment strategies and seek professional advice to optimize their tax liabilities under the new regime.