Higher Capital Gains Tax: Who Benefits the Most?

Higher Capital Gains Tax: Who Benefits the Most?

Discover how the Union Budget 2024 changed capital gains tax in India. Learn about the new rates, their impact on taxpayers, and who benefits the most from these updates with Research 360 by Motilal Oswal.
04 Aug, 2024 10:00am
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The Union Budget 2024 included many amendments to capital gains taxation in India. These changes have sent ripples across different segments of the taxpayer community, with assessees, analysts and experts all weighing in on how the new changes in the capital gains tax rates could impact individuals in different income categories. 

Some experts opine that the new capital gains tax system may benefit taxpayers in the long run, while others focus on the increased tax burden. Nevertheless, at first glance, one thing is clear: the Union Budget has proposed higher capital gains tax rates for financial assets. 

Let us delve into these changes, discuss how they impact different taxpayers and see who stands to benefit most from the new capital gains tax rates. 

Key Changes in Capital Gains Taxation in Union Budget 2024

The Union Budget 2024 has introduced significant changes in the capital gains tax framework in India. Here are the key changes you need to be aware of:

  • Harmonised Holding Periods

The holding period thresholds to determine whether the profits are LTCG or STCG have been streamlined. Listed securities (including listed shares, equity mutual funds, ETFs, listed bonds, sovereign gold bonds, InvITs and REITs) will now qualify as long-term holdings if held for 12 months or more. Unlisted securities (like gold mutual funds, debt funds and foreign equity funds) and non-financial assets will be considered long-term holdings if held for 24 months or more. 

  • Changes in Long-Term Capital Gains (LTCG) Tax Rates

The long-term capital gains tax on listed shares and equity mutual funds has been increased to 12.5% from 10%. This change is expected to impact investors who rely on long-term investments in stocks and other securities.

  • Changes in Short-Term Capital Gains (STCG) Tax Rates

Short-term capital gains tax rates have also been revised in the Union Budget 2024. For specified financial assets, such as listed securities, the STCG tax rate has been increased from 15% to 20%. 

  • Tax Treatment of Unlisted Securities

Unlisted bonds, debentures and debt mutual funds will continue to attract capital gains tax at the income tax slab rates applicable to the taxpayer, no matter what the holding period is.

How the New Tax Rates Could Lead to Higher Capital Gain Tax

Let us discuss an example of how these new capital gains tax rates could lead to additional taxes. 

Assume an investor purchases the shares of a listed company for Rs. 1,00,000 and sells them after 18 months for Rs. 1,50,000, realising a profit of Rs. 50,000. Before the changes in Union Budget 2024, this would have been considered a long-term capital gain and taxed at 10%, resulting in a tax liability of Rs. 5,000. 

However, under the new capital gain tax rules, the same gain will be taxed at 12.5%, leading to a tax liability of Rs. 6,250. This means an increase of Rs. 1,250 in the capital gains tax payable by the investor. This example demonstrates how the increased tax rates can lead to higher capital gains tax liabilities for investors — particularly those who hold assets for the long term and benefit from substantial capital appreciation.

The Impact of the New Capital Gains Tax Rates

These higher capital gains tax rates mainly impact the investing community in India — which, contrary to popular belief, constitutes only a small portion of the overall population. According to Finance Secretary Somnath, high-income individuals in India earn a significant majority of capital gains reported in the country. These taxpayers, with earnings above Rs. 15 lakhs, account for 88% of the total capital gains income.

In addition, individuals with an income exceeding Rs. 1 crore contribute to 62% of the capital gains income. Company promoters, who currently hold around 50% of the stock market, are expected to be considerably affected by the increased tax rates. Experts foresee that in three decades, the holdings of this demographic could diminish to 20%. 

Who Benefits the Most from These Changes? 

The changes in capital gains tax and other reforms introduced in the Union Budget 2024 are expected to benefit the real middle class — which forms a significant portion of the Indian population and represents a larger segment than those paying capital gains tax. 

The new tax slab changes and increased standard deduction could result in annual savings of Rs. 17,500 for individuals with an annual income of Rs. 10 lakh or more. Moreover, the reduced taxes could also lead to a decrease in health and education cess, offering further benefits to the true middle class. 

It is also expected that the additional revenue collected from the increased capital gains tax on the wealthy will enable the government to implement policies that focus on equitable wealth distribution. These policies will ultimately support those living below the poverty line and help boost the real income of the middle class. 

How the Higher Capital Gains Tax May Benefit the Middle Class

The higher capital gains tax on the wealthy can indirectly benefit the middle class through increased government revenue and spending. Let us consider an example to understand this better.

Suppose the government collects an additional Rs. 10,000 crore annually from the increased capital gains tax on high-income earners. This extra revenue can be allocated towards various welfare schemes and infrastructure projects that directly benefit the middle class.

For instance, the government could use a portion of this revenue to subsidise healthcare costs for middle-class families. By providing affordable healthcare services, the government can reduce the financial burden on middle-class households and allow them to allocate their resources towards other essential needs like education and housing.

Moreover, the government could also invest in public infrastructure projects, such as building roads, schools, and hospitals in middle-class neighbourhoods. These investments can improve the quality of life for middle-class citizens, create job opportunities and stimulate local economic growth.

Conclusion

The bottom line is that the changes introduced in Budget 2024 contribute to fiscal consolidation and responsible wealth distribution — both of which are crucial for long-term economic growth in India. 

While the direct benefits of higher capital gains tax on the wealthy may not be immediately apparent to the middle class, the indirect benefits through increased government spending and targeted welfare schemes can positively impact their lives in the long run. However, the actual extent of these benefits would depend on the government's efficient allocation and utilisation of the additional revenue.

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