FM Sitharaman announces hike in long-term capital gains tax to 12.5%, short-term capital gains to 20%

If you plan to sell your equity investments within 12 months, you will attract more tax than before, as Union Finance Minister Nirmala Sitharaman announced that short-term capital gains (STCG) on some assets will be hiked from the current 15% to 20%.

"The rate for short-term capital gain under provisions of section 111A of the Act on STT paid equity shares, units of equity oriented mutual fund and unit of a business trust is proposed to be increased to 20% from the present rate of 15% as the present rate is too low and the benefit from such low rate is flowing largely to high net worth individuals," Sitharaman said.

"All other financial assets and all non-financial assets shall continue to attract the applicable tax rate," she said. 

Additionally, the long-term capital gains (LTCG) tax has been hiked from the current 10% to 12.5%.

Notably, the exemption limit for long-term capital gains tax has been increased to Rs 1.25 lakh from Rs 1 lakh.

Sitharaman said that the listed financial assets held for more than a year will be classified as long term, while unlisted financial assets and all non-financial assets will have to be held for at least two years to be classified as long-term.

Finance Minister added that the unlisted bonds and debentures, debt mutual funds and market linked debentures, irrespective of holding period, will attract tax on capital gains at applicable rates.

The budget also proposed increasing the Securities Transaction Tax (STT) rate on the sale of an option in securities from 0.0625% to 0.1% of the option premium and on the sale of futures in securities from 0.0125% to 0.02% of the price at which such futures are traded.

"As a venture capital fund, we see the Indian Budget 2024’s tax reforms as a major boost for the VC, PE, and startup ecosystem. The increase in LTCG tax rate for financial assets to 12.50% and STCG to 20% may pose challenges for listed investments. Still, it’s a significant advantage for other financial products like startups and Alternative Investment Funds. The reduction in LTCG tax from 20% to 12.50% for these investments will result in substantial savings and increased IRR, fostering growth and innovation. While we await the detailed budget, this move is a long-awaited positive development that will make India an even more attractive destination for global investors and drive further growth in the venture capital and private equity sectors," said Anirudh A Damani -Managing Partner - Artha Venture Fund.