The Income Tax Department has released a set of FAQs addressing the changes brought about in the taxation of capital gains by the Finance (No.2) Bill, 2024, in the Union Budget presented on Tuesday. According to the department, the taxation of capital gains has been rationalised and simplified across five broad parameters: simplified holding periods, uniform rates for the majority of assets, elimination of indexation with a reduced rate, parity between residents and non-residents, and no change in rollover benefits.

The new provisions for taxation of capital gains will come into force on July 23, 2024, and will apply to any transfer made on or after that date. The holding period for assets has been simplified, reducing the previous three holding periods to just two: one year for listed securities and two years for all other assets. This change will benefit holders of listed units of business trusts, as the holding period is reduced from 36 months to 12 months. For gold and unlisted securities (other than unlisted shares), the holding period is reduced from 36 months to 24 months. However, the holding period for immovable property and unlisted shares remains unchanged at 24 months.

The rate structure for STT-paid capital assets has also been revised. The rate for short-term STT-paid listed equity, equity-oriented mutual funds, and units of business trusts has increased from 15% to 20%. Similarly, the rate for these assets for long-term gains has increased from 10% to 12.5%. Additionally, the exemption limit for long-term capital gains under Section 112A has been raised from Rs. 1 lakh to Rs. 1.25 lakh, applicable from FY 2024-25 onwards.

For other long-term capital gains, the rate has been rationalized to 12.5% without indexation, down from the previous 20% with indexation. This change simplifies the taxation and computation of capital gains. The reduction in the rate is expected to benefit most taxpayers, although the extent of the benefit will vary depending on the gains relative to inflation.

Taxpayers can continue to avail of the rollover benefits on capital gains, with no changes to the existing provisions. Long-term capital gains can be invested in houses under Section 54 or Section 54F, or in certain bonds under Section 54EC. The investment limit for 54EC bonds is up to Rs. 50 lakh, and in other cases, capital gains are exempt from tax subject to specific conditions.

The overall rationale for these changes is to simplify the tax structure, easing compliance, computation, filing, and record maintenance. This also removes differential rates for various classes of assets, streamlining the entire process.