Understanding Capital Gains Tax on Shares & Mutual Funds in India for FY 2024-25 (AY 2025-26)

Investing in the stock market, whether through direct share purchases or equity mutual funds, can be a highly rewarding endeavor. Nevertheless, it's essential to grasp the tax implications of your investment returns for successful financial management and adherence to regulations. The Union Budget released in July 2024 introduced notable modifications to capital gains taxation, which will take effect from the Financial Year 2024-25 (April 1, 2024, to March 31, 2025).

This blog post aims to explain the taxation of capital gains derived from shares and equity mutual funds for FY 2024-25, including the new rates, holding periods, and available exemptions.

What are Capital Gains?

When you dispose of a capital asset (such as shares or mutual fund units) at a price greater than its purchase price, the profit you earn is termed a capital gain. On the other hand, if you sell it for less than its purchase price, it results in a capital loss. In India, capital gains are taxable.

Holding Period: The Basis for Classification

The tax treatment of your capital gains is significantly influenced by the duration for which you owned the asset before its sale (the holding period). For listed equity shares and equity-oriented mutual funds (funds allocating at least 65% in domestic listed equity shares), the classification is as follows:

1. Short-Term Capital Asset: Held for 12 months or less.
2. Long-Term Capital Asset: Held for more than 12 months.

Important Changes Effective July 23, 2024 (Affecting FY 2024-25)

The Finance (No. 2) Act, 2024, introduced alterations effective from July 23, 2024. Consequently, gains realized during FY 2024-25 may be taxed differently based on whether the sale happened before or on/after this date.

Taxation of Short-Term Capital Gains (STCG)

• Asset: Listed Equity Shares / Equity-Oriented Mutual Fund Units
• Holding Period: <= 12 months
• Governing Section: Section 111A (applies if Securities Transaction Tax - STT - is paid on the sale on a recognized stock exchange)
• Tax Rate for FY 2024-25:
  • For sales executed before July 23, 2024: 15%
  • For sales executed on or after July 23, 2024: 20%
• Additional Levy: Applicable surcharge (calculated on total income) plus a 4% Health and Education Cess.
• Basic Exemption Limit: Resident individuals may offset their STCG under Section 111A against any shortfall in the basic exemption limit only if their other taxable income is below that threshold. Non-residents are not eligible for this adjustment.
• Deductions: No deductions under Chapter VI-A (such as Section 80C, 80D, etc.) are permitted against STCG taxed under Section 111A.
• STCG without STT: When STT is not paid (for example, in off-market transactions), the STCG is included in your total income and taxed at your applicable slab rates.

Taxation of Long-Term Capital Gains (LTCG)

• Asset: Listed equity shares or equity-oriented mutual fund units.
• Holding Period: More than 12 months.
• Governing Section: Section 112A (applies only if STT is paid at the time of sale; for shares, STT must also have been paid at acquisition if bought after October 1, 2004).
• Exemption Limit for FY 2024-25:
  • If the sale occurs before July 23, 2024: The first ₹1 lakh of LTCG under Section 112A is exempt.
  • If the sale occurs on or after July 23, 2024: The first ₹1.25 lakh of LTCG under Section 112A is exempt.
• Tax Rate (on gains above the exemption limit):
  • If the sale occurs before July 23, 2024: 10%.
  • If the sale occurs on or after July 23, 2024: 12.5%.
• Indexation Benefit: Not applicable under Section 112A.
• Additional Levy: Applicable surcharge plus a 4% Health and Education Cess.
• Grandfathering (for assets acquired prior to February 1, 2018): To compute LTCG on assets obtained before February 1, 2018, the acquisition cost is considered as the higher of:
  • The actual acquisition cost.
  • The lower of (a) Fair Market Value as of January 31, 2018, and (b) the Full Value of Consideration (sale price).
• Deductions: No deductions under Chapter VI-A are allowed against LTCG taxed under Section 112A.

Taxation of Mutual Funds (Other than Equity-Oriented)

The Finance Act, 2023, along with changes in the subsequent Budget 2024, significantly modified the taxation of debt funds and other non-equity-focused funds:

• Specified Mutual Funds: Funds that invest 35% or less in domestic equity shares (such as most debt funds, gold ETFs, money market funds, and international equity funds).
  • Holding Period: Regardless of holding period, gains are categorized as Short-Term Capital Gains (STCG).
  • Tax Rate: Added to your income and taxed according to your applicable slab rate.
• Other Mutual Funds: Funds that invest more than 35% but less than 65% in domestic equity shares.
  • Holding Period:
    • STCG: Held for 24 months or less. Taxed at slab rates.
    • LTCG: Held for more than 24 months.
    • Sold before July 23, 2024: Taxed at 20% with indexation benefit.
    • Sold on or after July 23, 2024: Taxed at 12.5% without indexation benefit.

Taxation of Dividend Income

• Abolishment of DDT: Dividend Distribution Tax (DDT) was eliminated starting April 1, 2020.
• Taxability: Dividends received from shares or mutual funds during FY 2024-25 are added to your "Income from Other Sources" and taxed at your applicable slab rate.
• TDS: Companies and mutual funds must deduct Tax at Source (TDS) at 10% if the total dividend payment to a resident shareholder exceeds ₹5,000 in a financial year. (For non-residents, the applicable rate is 20% plus surcharge/cess, subject to DTAA benefits).
• Expense Deduction: You are eligible to claim a deduction for interest costs incurred while earning dividend income, restricted to 20% of the total dividend amount. No additional expense deductions are permitted.

Securities Transaction Tax (STT)

STT is a minor tax imposed on the value of securities traded on a recognized stock exchange. Paying STT is required to qualify for the reduced tax rates under Section 111A (STCG) and Section 112A (LTCG) for listed equity/equity mutual funds.

Surcharge and Cess

Be mindful that the total tax owed on capital gains includes:

• Surcharge: Imposed if your total income surpasses specific thresholds (₹50 lakh, ₹1 Cr, ₹2 Cr, ₹5 Cr). The maximum surcharge applicable to STCG (Sec 111A) and LTCG (Sec 112A) is capped at 15%.
• Health and Education Cess: Calculated at 4% on the sum of income tax plus surcharge.

Set-off and Carry Forward of Losses

• Short-Term Capital Loss (STCL): Can be offset against both STCG and LTCG within the same financial year.
• Long-Term Capital Loss (LTCL): Can only be set off against LTCG for the same year.
• Carry Forward: Unutilized STCL and LTCL may be carried forward for up to 8 assessment years and offset against corresponding capital gains (STCL against STCG/LTCG, LTCL solely against LTCG). To qualify for carry forward, losses must be declared in your ITR.

Reporting in Income Tax Return (ITR)

• All capital gains (STCG and LTCG) should be reported in Schedule CG of your ITR.
• Dividend income is to be reported under Schedule OS (Income from Other Sources).
• Positive News for Small Investors: For FY 2024-25 (AY 2025-26), taxpayers with LTCG under Section 112A up to the exemption threshold (₹1.25 lakh) and who meet other ITR-1 qualifications (total income up to ₹50 lakh, income from salary, a single house property, other sources, and specific agricultural income limit) can now file ITR-1. Previously, any capital gain necessitated filing ITR-2 or a higher form. A similar adjustment is applicable for ITR-4 (for presumptive income).

Conclusion

The tax regulations concerning capital gains from securities in FY 2024-25 have experienced significant modifications, particularly the rise in STCG rates (Sec 111A), LTCG rates (Sec 112A), and the LTCG exemption threshold, all taking effect from July 23, 2024. Grasping these details, especially the date-sensitive changes, is crucial. Maintain thorough records of your transactions (dates, purchase price, sale price, STT paid) to ensure accurate tax calculation and reporting.

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