NEW DELHI: The capital gains tax rules could be changed in the next budget if the buzz around it comes true. It has been reported by media that the finance ministry is looking at changing some of the anomalies in the capital gains tax rules.
The ministry has given hints in the past that it is not happy with a complicated capital gains tax structure and that it needs to be re-looked at. Revenue Secretary Tarun Bajaj has said in public that there is no logic for having different time frames and tax rates for different assets.
Complicated tax structure
Capital gains tax rates vary depending upon type of asset and period of holding. Period of holding decides whether the gains are taxable as long-term capital gains (LTCG) or short-term capital gain (STCG).
For example, any gains made from equities holding them for less than one year is considered short-term capital gains, and is taxed at 15%. But if the capital gain is made from holding in an equity share for more than one year, it is considered long term capital gains, and is taxed at 10%. For any other assets – debt, gold or properties – the holding period has to be over three years for the capital gains to be qualified as long term.
While short-term capital gains from equities is taxed at 15%, the same from debt, gold or any other asset is taxed at income slab rates. Long-term capital gains from non-equity assets are taxed at 20% after indexation. (Indexation is adjusting the cost price for inflation before arriving at the capital gains). If media reports are to be believed, the government is looking at simplifying the tax structure by bringing uniformity in holding periods to decide the nature of capital gains as short or long.
It can do so by increasing the holding period to three years for equities (like it is in case of other assets) for the capital gains to be considered as long-term. If that happens, you may have to hold your equities and equity mutual funds for a longer period to avail a lower rate of taxation at 10%. The government might also do away with a lower short-term capital gains tax of 15% in equities and bring it at par with other assets.
Need for simplification
Gopal Bohra, partner, direct tax, N.A Shah Associates, says : “Currently there are different holding periods for a particular asset to qualify as long-term capital asset (for example 1 year for listed securities, two years for immovable properties and three years for other assets) and similarly different rates are there for listed securities, unlisted securities, other capital assets, with indexation, , without indexation, etc. depending upon long term or short-term capital gain.” This creates lots of confusion for taxpayers, therefore, the government should consider simplifying this by bringing parity between different tax rates and holding periods, says Bohra.
The Association of Mutual Funds in India (AMFI) in its budget proposal has pointed out that the minimum holding period for units of debt-oriented mutual funds (listed or unlisted) to qualify as Long-Term Capital Asset is 36 months. However, it says direct investments in listed securities like bonds/debentures, government securities, derivatives, etc. listed on a recognised exchange in India and zero-coupon bonds (listed or unlisted) the holding period to qualify as long-term capital asset is only 12 months.
“The holding period for LTCG for direct investment in listed debt securities and zero-coupon bonds (listed or unlisted) and for investment through debt mutual funds should be harmonised and made uniform,” it said in its budget proposal. AMFI has also sought parity in tax treatment with respect to capital gains on withdrawal of investments in ULIPs of life insurance companies and redemption of mutual funds units, so as to bring about a level-playing field between ULIPs and MF schemes.
Though the revenue secretary has in the past stressed on the need for having higher tax on LTCG from equities, it is unlikely that the government may go for a hike in rate given it could dent the equity market sentiments in the country. But investors should be ready for some changes in capital gains tax rule and be prepared for the likely repercussions on their investment decisions.
