Budget 2025: An Overview Of The Current Capital Gains Tax

As the Union Budget 2025 approaches, set to be presented on February 1, there is growing anticipation about potential revisions to the capital gains tax structure. The modifications introduced in Budget 2024, which took effect on July 23, 2024, brought new tax rates and holding periods for various asset classes. This year, industry groups and financial bodies have voiced suggestions for further refinement.

AMFI’s Proposal on Debt Mutual Funds

One notable recommendation comes from the Association of Mutual Funds in India (AMFI). The body has advocated for a uniform tax treatment between debt mutual funds and listed bonds. AMFI has proposed a 12.5% tax rate on gains from debt mutual funds held for over 12 months. Currently, such gains are classified as short-term and taxed at higher individual income tax slab rates, making them less attractive to investors.

Current Capital Gains Tax Framework at a Glance

Here is an overview of the existing structure for capital gains taxation, as shaped by last year’s changes:

Short-Term Capital Gains (STCG)

1. Equity Investments
   • Gains from listed equity shares and equity-oriented mutual funds held for less than 12 months are taxed at 20%, up from the previous 15%.
2. Other Assets
   • For real estate, bonds, and unlisted shares held for less than 24 months, the gains are taxed according to the taxpayer’s income tax slab.

Long-Term Capital Gains (LTCG)

1. Equity Investments
   • Gains from equity shares, equity-oriented mutual funds, and units of business trusts held for more than 12 months are taxed at 12.5%, applicable on gains exceeding ₹1.25 lakh annually. The exemption limit was raised from ₹1 lakh to ₹1.25 lakh in the 2024 budget.
2. Other Assets
   • Gains from real estate, bonds, and other non-financial assets held for over 24 months are taxed at 12.5% without indexation benefits. However, for properties acquired before July 23, 2024, taxpayers can choose between:
     • A 12.5% tax rate without indexation, or
     • A 20% tax rate with indexation.

Key Holding Periods

• 12 months: Applies to listed equity shares, equity-oriented mutual funds, and similar securities.
• 24 months: Applies to real estate, bonds, and other non-financial assets (reduced from 36 months for real estate in 2024).

Exemptions on Capital Gains

Taxpayers can still claim exemptions on long-term capital gains by reinvesting the proceeds in eligible assets, including:

• Residential properties.
• Agricultural land.
• Specified bonds (e.g., NHAI, REC).
• Special Economic Zones (SEZs).
• Eligible start-ups under Section 54GB.

Outlook for Budget 2025

As investors and industry experts await the Budget, the focus remains on aligning the tax framework to enhance fairness and incentivize long-term investments. Whether the government adopts AMFI’s recommendation or introduces further adjustments to capital gains tax rules will be closely watched. The changes could have a significant impact on individual investors, mutual fund holders, and the broader investment landscape.