When Finance Minister Nirmala Sitharaman presents the Union budget later this month, one thing investors, taxpayers, corporates, and mutual fund houses will be keen to know will be changes in the capital gains tax structure. Currently, the capital gains tax system lacks uniformity, leading to varying tax burdens for investors based on the type of asset and the duration for which it is held. This disparity often results in confusion among taxpayers. The government has acknowledged this issue and is deliberating on potential modifications to the tax framework to foster fairness and consistency across different asset classes.
Ahead of the full Budget to be presented by the NDA government, Christopher Wood, Global Equity Strategist at Jefferies, said that there should be no capital gains tax in the current scenario.
The gains from transferring capital assets are subject to taxation under the income category of capital gains. The current regulations concerning the calculation of taxable capital gains and applicable taxes are intricate and diverse. The government has previously shown willingness to reform the capital gains tax structure to streamline it, and the upcoming Budget in 2024 might provide an opportunity for such modifications.
Speaking to CNBC TV18, Wood gave examples of Hong Kong, where there are no capital gains taxes. He said that the absence of these taxes could stimulate greater investment and market expansion.
He also added that there should be a restructuring of the taxes. He recognised the significance of structuring capital gains taxes to encourage long-term investments. He proposed implementing substantial variations in tax rates between short-term and long-term investments.
“Capital market tweaks in the budget will hurt markets more than the election verdict reaction,” he added.
In 2018, Finance Minister Arun Jaitley introduced a 10 per cent Long-Term Capital Gains (LTCG) tax on gains exceeding Rs 1 lakh, without providing indexation benefits. This decision brought about a significant change from the previous regime established in 2004 by the then Finance Minister P Chidambaram. During Chidambaram’s tenure, LTCG was exempt from tax, while the Securities Transaction Tax (STT) remained levied on all transactions in the stock exchange.
Presently, investors face a 15 per cent short-term capital gains tax (STCG) if they hold listed stocks for less than a year. On the other hand, if an individual realizes long-term capital gains surpassing Rs 1 lakh (with a holding period exceeding 12 months) from selling equity shares or equity-oriented units of a mutual fund, the gain will be liable to a long-term capital gains (LTCG) tax of 10 per cent (plus cess as applicable).
Many other experts have also said that a rise in capital gains tax can trigger a market correction.
“An increase in the tenure / holding period for classification of gains into long-term and short-term will not impact the market much. There might be a correction for a day or two as a knee-jerk reaction, but the markets will find their feet soon. However, if the rate of taxation on sale of shares of listed entities is hiked, the markets can dip up to 3 – 5 per cent and the sentiment can remain subdued for a month or so,” said Nishit Master, portfolio manager, Axis Securities PMS.
Some experts have also demanded that an increase in the deduction limit can bring in some relief.
Preeti Zende, founder of Apna Dhan Financial Services, said: “If the LTCG limit for deduction is raised from Rs 1 lakh to Rs 3 lakh, it would be a great relief. Secondly, the new tax started on debt mutual funds is detrimental to their growth. Investors demand that this new tax be reversed or at least that indexation benefit be restored for debt mutual funds.”
The Association of Mutual Funds in India (AMFI) is suggesting changes to the tax treatment of long-term capital gains (LTCG) under section 112A of the Income Tax Act. Their proposal includes a 10% tax rate on gains surpassing Rs 2 lakh per year for LTCG on listed equity shares or equity-oriented fund schemes held for over one year but less than three years. Furthermore, they are proposing a full exemption from capital gains tax for assets held for more than three years.
“The existing threshold limit of Rs 1,00,000 in a financial year is very low. Exemption from LTCG tax after 3 years holding period will encourage long-term investments in equities and will help channelise more household savings in to the equity markets, thus helping the Indian economy,” AMFI noted.