Long-term capital gains (LTCG) tax is back in focus after SBI Research reportedly recommended scrapping the tax on equity investments, arguing that the move could help attract foreign capital and encourage longer-term investment.
Finance Minister Nirmala Sitharaman was also reported to have declined to commit to changes in LTCG tax or securities transaction tax (STT) ahead of the next Union Budget. The discussion has renewed investor interest in whether the government could review the tax regime.
For investors, the issue goes beyond stock market profits. LTCG tax applies to gains from several types of assets, including shares,, property and gold, although the applicable rates, holding periods and exemptions differ. The Union Budget 2024 changed the rules significantly, raising the tax rate on eligible equity LTCG from 10% to 12.5% while increasing the annual exemption threshold from ₹1 lakh to ₹1.25 lakh.
What is LTCG tax and what are the rates for different investments?
Capital gains are profits earned when you sell or transfer a capital asset for more than its acquisition cost, after accounting for eligible expenses and adjustments. The gain is classified as short-term or long-term depending on how long the asset was held before its sale.
For transfers made on or after 23 July 2024, the broad tax treatment for common investments is as follows.
|
Investment |
LTCG tax treatment |
| Listed equity shares | 12.5% on eligible gains exceeding ₹1.25 lakh a financial year |
| Equity-oriented mutual funds | 12.5% on eligible gains exceeding ₹1.25 lakh a financial year |
| Property and gold | 12.5% without indexation, subject to applicable exceptions |
| Certain other long-term capital assets | 12.5%, subject to the applicable provisions |
| Source: Income Tax Department; Union Budget 2024. | |
The rates exclude applicable surcharge and cess. Equity LTCG treatment also requires the relevant securities transaction tax conditions to be met. and other specified assets have separate rules, so investors should not assume every mutual fund qualifies for the equity exemption.
How does the ₹1.25 lakh exemption work, and what is the holding period?
Eligible long-term capital gains from listed equity shares, equity-oriented mutual funds and business trust units covered by Section 112A receive an annual exemption of ₹1.25 lakh. This applies to qualifying gains, not the total value of investments sold.
For example, an investor who makes ₹2 lakh in eligible equity LTCG during a financial year can deduct the ₹1.25 lakh exemption, leaving ₹75,000 taxable at 12.5%. The tax would be ₹9,375 before cess and surcharge.
The holding period determines whether gains qualify as long-term or short-term. Listed equity shares and equity-oriented mutual funds generally qualify after more than 12 months. Immovable property and unlisted shares generally require a holding period exceeding 24 months. Other assets may follow different rules.
The exemption applies to the aggregate eligible gains under Section 112A for the financial year. Gains from property or gold do not qualify for this particular exemption.
What changed for property sellers after Budget 2024?
One of the most significant changes was the removal of indexation for most long-term capital assets transferred on or after 23 July 2024.
Indexation adjusts an asset’s acquisition cost for inflation, potentially reducing the taxable gain. The government lowered the general LTCG rate to 12.5% but removed indexation for most assets.
A transition relief applies to resident individuals and Hindu Undivided Families selling land or buildings acquired before 23 July 2024. They can compare the tax under the new 12.5% rate without indexation with the earlier 20% rate with indexation and use the old method if it results in a lower tax liability, subject to statutory conditions.
Investors may also qualify for exemptions under provisions such as Section 54 for eligible residential property gains, Section 54F for certain other long-term assets and Section 54EC for investments in specified . These exemptions have conditions relating to reinvestment, timelines and eligibility.
What investors should know
Reports about the finance minister’s remarks on 13 October have drawn attention to the possibility of a review ahead of the next Union Budget.
Punit Shah, partner at Dhruva Advisors, said there is a case for rationalising the long-term capital gains (LTCG) tax regime in the current economic environment.
“Considering the current economic situation, there is a reasonable case for the FM to consider rationalisation of LTCG regime. This could include abolition of LTCG tax on listed equity shares and reduction of holding period of equity shares for being considered as long term asset,” Shah said.
He added that securities transaction tax (STT), which was introduced in lieu of capital gains tax, adds to the tax burden on equity transactions, making them more expensive and less attractive. Rationalising LTCG taxes could also simplify processes and compliance requirements.
Until the government announces and implements a change, investors should calculate their tax liabilities under the existing provisions rather than assume a reduction is coming.