What Budget 2024 Means for Capital Gains Tax: A Focus on NRIs and Residents

What is the tax on capital gains?

The profit made from the sale of a capital asset is subject to capital gains tax. Among these assets are equities, mutual funds, real estate, and more. Capital gains are categorized as follows based on the holding period:

• When the holding period is shorter, such as less than 24 months for real estate, short-term capital gains (STCG) are applicable.
• Assets retained for longer than the designated short-term period are subject to long-term capital gains (LTCG).

Depending on the kind and length of time the asset is kept, different tax rates and exemptions apply.

Important Modifications to the 2024 Budget's Capital Gains Tax

1. Long-Term Capital Gains Taxation for Non-Resident Indians

• Single Tax Rates: In place of the previous differential rates, NRIs will now pay a single LTCG tax rate on all designated assets. Although uniformity is ensured by this simplification, certain NRIs may have a higher tax obligation.
• Enhanced Compliance: If the profits relate to Indian assets, NRIs are required to include all international capital gains in their Indian income tax reports.

2. Limiting Residential Property Investment Exemptions

In the past, taxpayers may claim exemptions under Section 54 or Section 54F by reinvesting capital gains in many residential properties. This exemption is limited to a single residential property under the current regulations. This seeks to increase government income by reducing excessive tax-saving techniques.

3. Modifications to Tax Withheld at Source (TDS)

• The TDS rates for NRIs' capital gains have been increased. This will minimize tax avoidance and guarantee upfront tax collection.
• Transactions involving cryptocurrency are now included in the additional asset categories that TDS now covers.

4. Advantages of Indexation

The indexation advantage for LTCG on some assets, such bonds and real estate, is kept in the budget. This enables taxpayers to account for inflation in the purchasing price.

5. Higher Surcharge for the Wealthy Is Introduced

As part of the government's plan to impose a higher tax on the ultra-wealthy, the LTCG surcharge for those whose income exceeds INR 5 crore has been raised to 37%.

Effects on Non-Resident Indians

Investments in Real Estate:

• NRIs frequently make real estate investments in India. They might need to reconsider their portfolio strategy in light of the restriction on reinvestment exemptions.
• Careful cash flow planning will be required due to higher TDS rates.

Investing in the stock market:

• Although uniform tax rates make compliance easier, some investments may see greater effective taxes as a result.
• Under the new framework, NRIs who use portfolio investment schemes (PIS) must reassess their objectives.

Money Repatriation:

Repatriating money from India may necessitate more disclosures and documentation due to stricter compliance and reporting requirements.

Effects on Locals

Homebuyers from the middle class:

Residents who upgrade to numerous residences may have a higher tax obligation due to the limitation on exemptions under Section 54.

Investors in stocks and mutual funds:

• For long-term investors, the preservation of indexation advantages is a comfort.
• Increased TDS provisions may result in greater taxes for short-term trades.

HNIs, or high net worth individuals:

HNIs are greatly impacted by the higher fee, especially those having high LTCG from stock or real estate transactions.

Doable Actions for Taxpayers

Regarding NRIs:

• Review Asset Holdings: Considering the updated tax consequences, determine whether to keep or sell Indian assets.
• Leverage DTAAs: Maximize your tax deductions using double taxation avoidance agreements between India and your home country.
• Plan Repatriations: Make sure all paperwork is in order and that Indian tax regulations are followed to prevent fines.

For Locals:

• Simplify Your Investments: Under the new regulations, concentrate on assets that yield higher post-tax returns.
• Employ Financial Advisors: To reduce tax obligations, get expert counsel for significant transactions.
• Arrange Real Estate Sales Sensibly: Schedule real estate sales to take advantage of Section 54 exemptions.

In Conclusion

Both residents and NRIs would be impacted by the substantial changes to the capital gains tax structure brought about by the 2024 Budget. Taxpayers must proactively adjust to reduce their responsibilities even as the government strives for a simpler and more equitable tax system. Effectively navigating these transitions can be facilitated by being informed and getting professional advice.

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