The Union Finance Minister presented the Budget for Financial Year 2024-25 in the Lok Sabha on July 23, 2024, introducing significant changes to the capital gains taxation framework, abolishing angel tax, and rationalising TDS rates under the Income Tax Act, 1961. The Finance (No. 2) Bill, 2024 proposes a comprehensive restructuring of how investment gains are taxed across asset classes.
Background
The Indian capital gains tax regime had evolved incrementally over several decades, resulting in a complex framework with different holding periods, tax rates, and indexation benefits depending on the asset class. Listed equity, unlisted shares, debt mutual funds, real estate, and other capital assets each had distinct treatment, creating compliance challenges and arbitrage opportunities.
The Budget Session of Parliament for 2024 commenced on July 22, 2024, with the Finance Minister presenting the Economic Survey, followed by the Budget presentation on July 23. This was the first full Budget of the third term of the current government, presented against the backdrop of GDP growth projected at 7.2 per cent for FY25 and the fiscal deficit target set at 4.9 per cent of GDP.
Key Provisions
The Budget proposes the following structural changes to capital gains taxation and related provisions:
Short-term capital gains (STCG) rate increase: The tax rate on STCG for listed equity shares and equity-oriented mutual fund units under Section 111A is raised from 15 per cent to 20 per cent.
Long-term capital gains (LTCG) rate revision: The LTCG tax rate under Section 112A for listed equity and equity-oriented funds is increased from 10 per cent to 12.5 per cent. The exemption threshold is raised from Rs 1 lakh to Rs 1.25 lakh per annum.
Indexation benefit removal: The benefit of cost inflation indexation, previously available for computing LTCG on real estate and certain other assets, is proposed to be removed. In its place, a uniform LTCG rate of 12.5 per cent applies without indexation. A grandfathering provision allows taxpayers to compute gains on properties acquired before July 23, 2024 using either the old method with indexation at 20 per cent or the new method without indexation at 12.5 per cent, whichever is more beneficial.
Angel tax abolition: Section 56(2)(viib) of the Income Tax Act, commonly known as the angel tax provision, is proposed to be abolished for all classes of investors. This provision had previously subjected share premiums exceeding fair market value received by unlisted companies to tax.
TDS rationalisation: TDS rates on several categories of payments are rationalised downward, including reductions in TDS on e-commerce transactions and insurance commissions.
Unified Pension Scheme (UPS): A new pension scheme for government employees is announced, offering assured pension alongside a contributory framework.
Implications for Practitioners
The capital gains tax restructuring demands immediate attention from tax advisors and investment planners. The removal of indexation benefit for real estate transactions represents a fundamental shift that materially affects the after-tax economics of property investment, particularly for assets held over long periods where inflation-adjusted cost bases significantly reduced taxable gains.
Practitioners advising on real estate transactions need to carefully model the grandfathering provision for properties acquired before July 23, 2024. The choice between the old method (20 per cent with indexation) and the new method (12.5 per cent without indexation) will depend on the specific holding period, acquisition cost, and quantum of appreciation — there is no universally optimal approach.
The abolition of angel tax removes a significant compliance burden and litigation risk for the startup ecosystem. Venture capital and private equity practitioners who routinely structured investments to mitigate Section 56(2)(viib) exposure can now adopt more straightforward transaction structures.
The uniform rate structure across asset classes simplifies compliance but eliminates tax-efficient asset allocation strategies that relied on differential treatment.