Budget 2024: Taxation related to capital gains in equity market transactions will affect you— THIS is how

Finance Minister Nirmala Sitharaman has proposed drastic changes in capital gains taxation. This article will discuss budget proposals related to the taxation of equity market transactions.

Increase in the tax rate and enhanced tax-free amount of long-term capital gains

Presently, the profits on the sale of listed shares and units of equity-oriented schemes of mutual funds held for twelve months or less are treated as short-term capital gains and are taxed at flat 15% under Section 111A if Securities Transaction Tax (STT) has been paid on the same.

If the same is held for over twelve months, the profits are treated as long-term capital gains and are taxed at a flat rate of 10% beyond the initial ₹1 lakh. This was earlier taxed at zero rate and came tax-free in your hands under Section 112A without any benefit for indexation.

The finance minister has retained the holding period requirement for listed shares and equity-oriented scheme units to become long-term capital assets but has proposed increasing tax rates for long-term and short-term capital gains on these assets.

She has proposed increasing the short-term capital gains on these investments from 15% to 20% and the tax rate on long-term capital gains from 10% to 12.50%.

Moreover, the finance minister has also proposed to increase the initial long-term capital gains from ₹1 lakh to ₹1,25,000, on which no tax is payable.

Please note that the grandfathering provisions introduced in the 2018 budget will continue. The grandfathering provisions provide that in case the listed shares or units of equity-oriented schemes were acquired before Feb 1, 2018, the closing price in case of shares and Net Asset Value in case of units of equity-oriented schemes on Jan 31, 2018, could be taken as your cost of acquisition for computation of capital gains.

Increase in rates of Securities Transactions Tax

The FM also proposed an increase in the rates of STT payable on derivative transactions in equity, which is popularly called F&O. For an option, in securities, the STT rate has been hiked from 0.0625% to 0.1% of the option premium, which is the same as levied on actual delivery transactions.

Regarding futures in securities, the STT is proposed to be hiked from 0.0125% to 0.02% of the price at which such futures are traded.

Changes in taxation of buyback of shares

Drastic changes have been proposed to tax money received from companies on the buyback of shares. Presently, money received on the buyback of shares is exempt in the hands of the shareholder under Section 10(34A). Still, the company has to pay tax at a flat rate of 20% + 12% surcharge and 4% cess in respect of the amount of buyback paid as reduced by the amount of money, including premium, if any, received by the Company.

The effective rate on buyback presently comes to 23.296%. So, though the shareholder does not pay anything from his pocket, he indirectly incurs a cost of 23.296% for the buyback effected by the company, irrespective of his slab rate. This rate is significantly higher than levied on even short-term capital gains on listed shares.

The finance minister has proposed abolishing the present scheme for taxing buyback shares. She proposes that companies are no longer required to pay any tax in respect of the buyback of shares, but instead, the amount received against the buyback of shares be treated as a dividend in the hands of the shareholder and taxed at the slab rate applicable to individual shareholders.

Moreover, since this amount is being treated as dividends, the cost of acquiring these shares cannot be claimed against the buyback amount received. So, as per the proposal, you are not allowed to claim any expenditure against the amount of buyback treated as a dividend.

This will adversely affect the promoter shareholders who are in higher tax slabs and will have to shell out significantly more money as tax than what was being paid by the company.

Though no deduction is allowed against the buyback amount treated as a dividend, as the buyback of shares results in the extinguishment of the shares, the shareholder will be able to claim the cost of acquisition as a loss on extinguishment of such shares as short-term or long-term capital loss depending on his holding period.

Such loss can be set off against the eligible capital gains during the year, and unabsorbed loss would be carried forward for set off in subsequent years.

The proposed tax regime will adversely affect the cash flow of small shareholders, who will have to pay tax on the full amount received on buyback. Depending on the availability of taxable and eligible capital gains, the benefit of deemed loss on extinguishing such shares may or may not be available for set-off.

The proposed provisions apply to buybacks on and after October 1, 2024. I feel this will result in fewer buybacks after the proposed tax regime is implemented.

Balwant Jain is a tax and investment expert and can be reached at jainbalwant@gmail.com and on @jainbalwant on X.

Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.