Investors must constantly keep a close eye on changes in the investment landscape to make timely adjustments to their portfolios in accordance with the new regulations. This makes it invariably decisive to understand the concept of taxes on capital gains and adopt strategies to minimize taxes, which can impact your portfolio growth.
Union Budget 2023-2024 proposed significant changes to simplify taxation, encourage economic expansion, and close gaps to guarantee the nation’s effective and efficient tax governance. However, there were no new updates to the tax laws that would have affected equity investment, stock, and F&O trading gains in 2023. Instead, the budget introduced important taxation-related changes to capital gains linked to residential real estate, gold, and market-linked debentures.
The budget has allayed all the concerns over the new capital gain tax regime related to equity investment, stock, and F&O trading gains. But along with that, the much-anticipated adjustments of upping the tax-exempted limit of long-term capital gain (LTCG) to more than 1 lakh and the inclusion of clauses to reduce tax system complications associated with capital gains have also been postponed until a later date.
As of now both short and long-term gains for stocks/equity will continue to be subject to the current rates. It implies that if securities transaction tax (STT) is paid, the first 1 lakh will be exempted from tax, and 10% will be charged on greater than 1 lakh LTCG. And, in the case of an off-market transaction, LTCG will be charged at the rate of 20%.
Investors anticipating an increase in the rate on LTCG have undoubtedly found this to be a relief. In addition, it is anticipated that keeping the current level of LTCG tax rates will help India maintain stability by preserving its competitive advantage.
Likewise, stocks and equity will still be subject to a 15% tax on short-term capital gains if STT is paid (STCG), and in case of an off-market transaction, the applicable tax slab rate will apply. By implementing the right strategies to reduce tax on capital gains, it is possible to avoid lower capital gains that result from unpaid STT.
During the pandemic period, through systematic investment strategies, equity-oriented funds attracted a flood of inflows. There were extraordinary gains made over the previous two years as a result of the pandemic’s rise in savings, some of which were invested in stocks. And, now, with no changes to the tax regime related to equity, stock, and F&O trading gains, high-net-worth individuals might as well switch their investments to specific equity instruments to continue earning higher returns on their investments along with benefitting from other reliefs in the budget 2023-24.
As for the gains from F&O trading, they are classified as business income because they are non-speculative. These bets are both risky and highly rewarding. Recently, retail investors have made significant inroads into the F&O market owing to the rewarding aspect. The gains associated with F&O will be taxed per the new tax regime’s slab rates to determine tax liability. The revised tax regime slab rates include no tax on income upto 3 lakhs, 5% on 3-6 lakhs, 10% on 6-9 lakhs, 15% on 9-12 lakhs, 20% on 12-15 lakhs, and 30% on above 15 lakhs. The rest of the trading regulations related to the F&O segment will be the same as last year.
India’s capital markets in recent years have performed better than those of comparable emerging economies, providing investors with better returns at a time when wealth around the world is tumbling due to geopolitical events and the remnants of the pandemic. Overall the finance minister has maintained a positive outlook for equity, stock, and F&O traders by deciding not to change the top corporate tax rates or the capital gains tax rules.
(The author of the article is Sidhavelayutham M, Founder & CEO, Alice Blue. Views express above are personal)