How Capital Gains Tax Rules Work for Different Investments in India

The primary objective of investing is to earn profits when the value of assets appreciates. However, these gains are not exempt from taxation hence having an understanding of the  Capital Gains Tax rules has become essential, especially in today’s financial landscape.

This blog explores the tax rules surrounding different investments, providing clarity to Indian investors. It also gives an insight into the tax implications for equity shares, Mutual Funds, Exchange-Traded Funds (ETFs), fixed income instruments, gold and real estate.

Capital Gains Tax: An Overview

Capital Gains Tax applies to the profits earned from selling certain assets—ranging from real estate to stocks and Mutual Funds.

As defined by the Income Tax Act, it includes profits earned from the sale of capital assets. These gains are subject to tax and the applicable rates depend on the nature of the investment. 

Taxation rules for equity shares

Equity shares whether listed or unlisted, domestic or foreign are considered capital assets under the Income Tax Act. The tax treatment varies based on the holding period and the type of shares. 

Listed domestic equity shares:

Individuals cannot claim any tax deduction under Sections 80C and 80U. The entire profit will be taxable and will be charged a flat 20% tax under Long-Term Capital Gains.

Here is the categorisation.

• Short-Term Capital Gains (STCG): Held for less than 12 months

• Long-Term Capital Gains (LTCG): Held for over 12 months

• STCG tax rate: 15%

• LTCG tax rate: 10% with an exemption of up to Rs 1 lakh on cumulative gains in a financial year

Unlisted domestic equity shares:

• STCG applies for a holding period of less than <24> months

• STCG is taxed at the investor's Income Tax slab rate

• LTCG is calculated at 20% of the gains with indexation for a holding period exceeding 24 months.

Foreign equity shares:

• Treated like unlisted equity shares

• STCG for a holding period less than 24 months is taxed at the Income Tax slab rate

• LTCG tax rate: 20% with indexation for a holding period exceeding 24 months.

Taxation rules for Mutual Funds

Mutual Funds classified into Equity, Debt, and Hybrid Funds have unique taxation rules.

Equity Mutual Funds:

• STCG (held for 12 months or less): 15%

• LTCG (held for over 12 months): 10% on gains exceeding Rs 1 lakh in a financial year.

Debt Mutual Funds:

• STCG (held for 3 years or less) is taxed at the investor's Income Tax slab rate

• LTCG (held for over 3 years) is taxed at 20% with indexation

• Budget 2023 changes have impacted investments in LTCG and STCG after Apr 01, 2023.

Hybrid Funds:

• Taxation depends on the proportion of equity-oriented investments.

International Funds:

• Taxed like Debt Mutual Funds

Taxation rules for Exchange Traded Funds (ETFs)

ETFs whether Index, Sectoral, Gold or International follow taxation rules similar to equity-oriented investments.

Taxation rules for Fixed Income Investments

Listed and unlisted debt instruments have different tax implications based on the holding period.

Taxation rules for gold investments

Physical gold, digital gold, Gold ETFs and Gold Mutual Funds follow the same tax rules. Sovereign Gold Bonds have unique rules while international funds investing in gold are taxed like Debt Mutual Funds.

Taxation rules for real estate investments

Different Capital Gains Tax regulations apply to real estate. STCG tax rules apply to a holding period of less than 24 months while LTCG rules are for the periods exceeding the same.

For real estate investments, the STCG tax rate aligns with the investor's Income Tax slab rate while the LTCG tax rate is fixed at 20%, incorporating indexation. Beyond these general principles, the purchase and sale of real estate involve additional tax rules, including a 1% TDS on property sales surpassing Rs 50 lakh and mandatory reporting of sales exceeding Rs 30 lakh to the Income Tax Department.

In recent times, Real Estate Investment Trusts (REITs) have gained prominence in India. There are two primary types – Listed REITs and REIT Mutual Funds. Listed REITs such as Brookfield India, Mindspace Business Parks and Embassy Office Parks REIT require Demat Accounts for stock exchange transactions. A holding period of more than <36> months qualifies for LTCG with a 15% STCG tax rate for units held for less than <36> months and a 10% LTCG tax rate on gains exceeding Rs 1 lakh.

Investors can opt for REIT Mutual Funds such as International REIT Fund of Funds without a Demat Account. Taxation follows the rules of Debt Mutual Funds with the STCG rate aligning with the investor's Income Tax slab rate for a 36 month holding period. On the other hand, the LTCG tax rate for REIT Mutual Funds is 20% with indexation for periods exceeding 36 months.

Conclusion

The best date to start your SIP is now, regardless of age. SIP investments grow with time. The earlier you begin, the more significant your wealth accumulation can be. Consider initiating your SIP at the start of the month for financial discipline and the benefits of Rupee Cost Averaging. Ensure you have a stable income to commit to SIP contributions comfortably. Additionally, special occasions or receiving a lump sum amount present excellent opportunities to kick-start your investment journey. Lastly, having clear financial goals can provide direction and motivation for your SIP. Remember, the right time to start is today, as it sets you on the path to achieve your financial aspirations.