How different assets are taxed: A look at capital gains rules across investments

Taxation rules: Capital gains taxation can significantly affect the post-tax returns investors earn from different asset classes. The tax treatment varies depending on the nature of the investment, the holding period and, in some cases, the date on which the asset was purchased.

Under the post-Budget 2024 framework, long-term capital gains (LTCG) on several assets are taxed at 12.5%, while short-term capital gains (STCG) on specified listed financial assets attracting Securities Transaction Tax (STT) are generally taxed at 20%.

Equity and market-linked investments

For equity mutual funds, exchange-traded funds (ETFs) and stocks, the holding period for LTCG is more than 12 months. STCG is taxed at 20%, while LTCG is taxed at 12.5%, subject to applicable exemptions.

Gold ETFs, REITs, InvITs and listed bonds also qualify for long-term treatment after a holding period of more than 12 months. However, their short-term gains are generally taxed at the investor's applicable slab rate, while LTCG is taxed at 12.5%.

The table notes that the 12.5% LTCG rate applies to gains above the applicable annual exemption threshold, with the relevant surcharge and cess also applicable.

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Debt funds and gold investments

Debt mutual funds have a different tax treatment depending on when they were purchased. Debt funds bought before April 1, 2023, qualify for long-term treatment after being held for more than 24 months, with LTCG taxed at 12.5%.

For debt mutual funds bought on or after April 1, 2023, gains are generally taxed at the applicable slab rate, irrespective of the holding period, subject to the applicable rules.

Gold mutual funds, physical gold and overseas mutual funds require a holding period of more than 24 months for long-term treatment. Their LTCG is taxed at 12.5%, while short-term gains are taxed at slab rates.

Foreign equity and international ETFs similarly require a holding period exceeding 24 months for LTCG treatment, with long-term gains taxed at 12.5%.

Real estate gets separate treatment

For real estate, the long-term holding period remains more than 24 months. The tax treatment also depends on when the property was acquired.

For properties purchased after July 23, 2024, LTCG is generally taxed at 12.5% without indexation. For properties purchased before that date, eligible taxpayers may benefit from a comparison between 12.5% without indexation and 20% with indexation, with the lower tax liability applying under the specified rules.

The varying tax treatment highlights why investors should consider both returns and taxation when choosing between asset classes.

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