The Union Budget 2023-24, the last full Budget of the current government before the 2024 general elections, is nigh—just three weeks from now. Like always, taxes will be a key focus area.
The taxation of capital gains on asset classes such as equity, debt, real estate, gold, and mutual funds holding these assets is one corner the finance ministry would likely turn the spotlight on this year. This arcane area has, in fact, been in the news for a few weeks now. Ahead of his retirement in November 2022, former revenue secretary Tarun Bajaj made a pitch to simplify and clean up the current capital-gains-tax regime. It’s long overdue, he said.
In India, tax breaks and the ease of availing them often guide people’s investment decisions. “Investments are being made in an asset class on the basis of its tax advantages and not on how good that asset class is,” Bajaj explained explained Business Standard Budget may not be right time to restructure capital gains tax: Revenue secy Read more . This has to stop, he implied.
For instance, an investor putting money in equity or a unit-linked insurance plan (ULIP)—a market-linked investment product with a sprinkling of life insurance—gets a much better tax deal than one putting money in, say, gold. That’s got much to do with the complexities that have crept into the tax rules over the years.
Capital gains arise when an investor sells an asset for more than the original cost. So, if you bought an equity share for Rs 2,000 (~$24) and sold it for Rs 2,500 (~$30), you will have to pay tax on the Rs 500 (~$6) capital gain.
Seems easy as cake, but it is anything but. It’s a madhouse, in fact. Even for dyed-in-the-wool practitioners of the craft. “Computation of capital gains and tax on the sale of assets can be extremely difficult, even for experts,” says Rakesh Nangia, chairman of business-advisory firm Nangia Andersen LLP. He adds that the difficulty takes on a new dimension with the increasing participation of retail investors in the stock market.
Here’s why. The holding period of an asset (long-term gains get concessional tax treatment), tax rates, indexation rules (to increase the cost of assets to account for inflation), tax breaks, etc., all make the process a mighty complex and challenging one.
Sample this: if an investor sells their listed equity shares or equity mutual funds after holding it for more than 12 months, the capital gains from such sale are considered ‘long-term’ and are taxed at 10%. But in the case of property, the gains will be ‘long-term’ only if it is sold after more than 24 months. Even then, the long-term capital gains (LTCG) will be taxed at a different rate—20% after indexation.
And if it’s gold, the gains will be ‘long-term’ only if you have held it for more than 36 months.