The Union Budget 2024-25 has introduced significant changes to the taxation of capital gains. The long-term capital gains (LTCG) tax on all financial and non-financial assets has been increased from 10 per cent to 12.5 per cent. To offset this increase, the exemption limit for LTCG tax has been raised from Rs 1 lakh to Rs 1.25 lakh, providing an effective incremental tax benefit of Rs 3,125 to small investors.
Classification of Assets
The new budget stipulates that all listed financial assets held for more than a year will be classified as long-term. For unlisted financial assets and all non-financial assets, the holding period has been set at a minimum of two years to qualify as long-term. This aims to streamline the period of holding conditions, ensuring clarity and consistency across various asset types.
STCG Tax Increase
In addition to changes in LTCG, the short-term capital gains (STCG) tax has been increased from 15 per cent to 20 per cent. This hike is likely to impact short-term equity investors more significantly, potentially discouraging short-term trading and promoting longer-term investments.
Impact on Investors
The marginal increase in LTCG tax to 12.5 per cent means long-term investors will face slightly higher taxes. However, the increased exemption limit offers modest benefits to small investors, encouraging them to continue investing. The uniform 12.5 per cent tax on LTCG, regardless of asset type, aims to simplify tax calculations and promote fairness across different investment categories.
Vikram Gupta, Founder and Managing Partner, IvyCap Ventures says, “The overhaul of the long-term capital gains tax (LTCG), reducing it from 20 per cent to 12.5 per cent, even without indexation, is another substantial change. This adjustment is poised to boost the domestic pools of capital in the startup ecosystem, increasing from the current 15 per cent to over 25 per cent in the next three to five years. This shift means the growth rate of domestic capital will be higher than that of foreign capital entering the ecosystem.”
Gupta believes, "These changes will encourage more startups to remain local rather than seeking registration outside India in places like the US or Singapore to raise capital. Overall, these budget provisions are set to generate a significant positive impact by fostering more domestic capital. I am quite excited about these developments, which bring very positive news for the entire VC and PE industry."
While sharing his thoughts, Anupam Mittal, Founder and Director, Shaadi.com and active Angel Investor mentions, "LTCG has also been harmonised across private and public companies at 12.5 per cent. Another shot in the arm for startup investors."
Furthermore, he listed what should be covered next, "Next on the list should be, one, taxing ESOPs only on exit and second, giving tax credit for startup investments."
Sectoral Implications
The new tax rates are expected to impact investments in various asset classes, including real estate, gold, and listed equities. The increase in STCG tax to 20 per cent may act as a deterrent to short-term investments but could incentivise longer-term holdings, thus potentially stabilising capital flows into the stock market and fostering a more stable investment environment. The government's efforts to streamline holding periods for assets further aim to remove disparities and create a uniform taxation framework.
Pearl Agarwal, Founder and Managing Partner, Eximius Ventures comments, "While the increase in capital gains exemption from Rs1 lakh to Rs 1.25 lakh will encourage the middle class to invest more in equities, mutual funds, and other linked products, an increase in long-term capital gains tax to 12.5 per cent will have a significant impact on HNIs' decision process of investing in alternative asset classes where money is typically tied in for 4-5 years. As domestic capital in India has started to explore alternative investments more actively, it is important for India to become a competitive jurisdiction for more fund managers to set up in India, invest in its local economy, and create jobs."
These changes hold profound implications for the startup ecosystem, signalling a transformative shift. Navin Honagudi, Founder and Managing Partner of Elev8 Venture Partners opines, "This move mirrors tax measures of other major nations, propelling Indian GDP growth. Furthermore, with 44 per cent of Indian startups situated outside large cities, such a step will further boost the expansion of innovation hubs in Tier II and III cities, thereby promoting balanced regional development and tapping into India's talent pool. This would foster a more risk-capital-friendly environment, increasing the likelihood of home-grown global digital behemoths, while also lowering technology dependence and promoting economic sovereignty in the long run."
Overall, these budgetary changes reflect a strategic shift towards promoting long-term investments while providing relief to small investors, ultimately aiming for a more equitable and simplified tax structure.
