Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG) are terms used to describe the profits earned from the sale of assets, such as equities, properties, or other investments. The classification into LTCG vs STCG depends on the holding period of the assets. For equities, if you hold an asset for over a year, the gains you receive on it classy as LTCG. Conversely, if you hold an asset for one year or less, the gains you receive on it fall under STCG.<\/p>\n\n\n\n
In the Union Budget 2024, Finance Minister Nirmala Sitharaman announced significant changes in the tax rates for both LTCG and STCG. The tax rate for LTCG has increased from 10% to 12.5% and the tax rate for STCG has increased from 15% to 20%.<\/p>\n\n\n\n
Also, the exemption limit on the sale of equity investments has been raised to \u20b91.25 lakh from \u20b91 lakh for the LTCG. This is a positive change, meaning that up to \u20b91.25 lakh long-term capital gains on equity-linked instruments will fetch tax-free returns. However, gains over this limit will attract the LTCG tax of 12.5%.<\/p>\n\n\n\n
As an outcome, investors’ strategies might change, potentially leading to a shift towards alternative investment options. Continue reading to understand the potential implications of the rise in capital gains tax.<\/p>\n\n\n\n
The budget has increased the capital gains tax, which may discourage retail investors. This shift is expected to have several implications. Major ones include:<\/p>\n\n\n\n
The budget has introduced higher tax rates on both LTCG and STCG. This change means that retail investors will now have to pay more in taxes on the profits they earn from their equity investments, effectively lowering their net returns. This increased tax burden could be especially challenging for investors who depend on their investment gains as a source of income or for future financial planning.<\/p>\n\n\n\n
Higher capital gains tax may propel investors to reevaluate and potentially alter their investment strategies. They may seek to minimise their tax liabilities by holding onto investments for longer periods to gain the exemption benefit of \u20b91.25 lakh or consider diversifying their investment portfolios to include tax-advantaged investment options.<\/p>\n\n\n\n
Higher taxes on capital gains may lead to a reduction in investment volumes in the market. Investors may become more cautious and hesitant to engage in frequent market investments, knowing that their gains will be considerably taxed. This fall in market investment activity could affect market liquidity and potentially enhance volatility, as fewer participants may actively buy and sell securities.<\/p>\n\n\n\n
In response to the higher capital gains tax, retail investors may shift towards more stable and safer investment products like Fixed Deposits (FDs), which offer guaranteed returns and are not subject to capital gains taxes. This shift in preference could lead to a reduced appetite for riskier investments like equities, which offer higher potential returns but come with higher volatility.<\/p>\n\n\n\n
While returns from FDs are taxed as per your income tax slab, this might still result in a lower tax burden compared to capital gains tax on equity investments. Also, if you consider tax-saver FDs, then you can reduce your taxable income up to \u20b91.5 lakh under Section 80C.<\/p>\n\n\n\n
Retail investors are likely to move to FDs to save on taxes. Here\u2019s why:<\/p>\n\n\n\n
FDs offer assured returns, making them an enticing option amidst market volatility.<\/p>\n\n\n\n
Five-year tax-saver FDs offer tax-saving benefits under Section 80C of up to \u20b91.5 lakh.<\/p>\n\n\n\n
FDs are considered one of the safest investment products with minimal risk because of the backing from Deposit Insurance and Credit Guarantee Corporation (DICGC) up to \u20b95 lakh.<\/p>\n\n\n\n
FDs are easy to open and manage thanks to the digital banking services. For instance, you can book an IndusInd Bank Fixed Deposit 100% digitally. Check out the other benefits offered:<\/p>\n\n\n\n To save taxes under Section 80C, you can also consider availing IndusInd Bank Tax-Saver FDs.<\/p>\n\n\n\nHigh interest rates<\/td> Up to 7.75% per annum (subject to change; for the latest rates, click here)<\/td><\/tr> Easy opening process<\/td> Open instantly in just three steps (choose an amount, select tenure, and confirm)<\/td><\/tr> Flexible payout<\/td> Monthly, quarterly, or at maturity interest pay-outs<\/td><\/tr> Flexible tenures<\/td> Range anywhere between seven days and 10 years<\/td><\/tr> Low booking amount<\/td> Begin with as low as \u20b9 10,000 for digital FDs<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n