New LTCG Tax Aims to Promote Longer Equity Holding Periods: Revenue Secretary

Revenue Secretary Sanjay Malhotra stated on Wednesday that the recent changes in capital gains tax for listed equities aim to motivate retail investors to retain their investments longer. The 2024-25 Budget has increased the short-term capital gains tax (STCG) on listed equity, equity-oriented mutual funds, and units of a business trust from 15% to 20%.

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Impact on Long-Term Investments

The long-term capital gains (LTCG) tax on these securities has also been raised from 10% to 12.5%. However, LTCG up to Rs 1.25 lakh annually will remain exempt from tax, an increase from the previous Rs 1 lakh exemption. Equities held for over one year are considered long-term investments.

Malhotra emphasised that this proposal will not adversely affect small investors who hold shares for more than a year due to the increased LTCG exemption limit. "We would encourage people to hold on to these shares for a longer period because that is investment," he said.

Encouraging Long-Term Holding

He added that the increase mainly impacts higher-income individuals rather than those in the middle and lower-income categories. "The benefit of Rs 1.25 lakh exemption for LTCG helps middle and low-income categories," Malhotra noted.

Additionally, Malhotra mentioned that the hike in securities transaction tax (STT) on futures and options (F&O) aims to discourage retail investors from engaging in speculative trades. "While we do believe that this will not fully curb this speculative instinct, but this is still a message to retail investors to stay away from F&Os as some study by Sebi shows 9 out of 10 investors in F&O actually lose money," he explained.

Changes in Securities Transaction Tax

The STT on the sale of an option in securities has been increased from 0.0625% to 0.1% of the option premium in the FY25 Budget. Similarly, the STT on the sale of futures has been raised from 0.0125% to 0.02% of the price at which such futures are traded.

Malhotra acknowledged that taxation alone might have a minimal impact on curbing speculative trading but stressed that it sends a signal to retail investors. "More, of course, we believe needs to be done if this is to be curbed. Taxation is only one measure and will have only that minimal impact perhaps on this trading," he said.

The changes aim to promote long-term investment habits among retail investors while addressing speculative trading practices through increased taxes and exemptions tailored for different income groups.