Why does the capital gains tax regime need a revamp?
India’s capital gains tax structure is complicated and it’s time to revamp it, Revenue Secretary Tarun Bajaj told business leaders in a post-budget interaction on Wednesday. Mint shows what the current structure looks like and how it can be simplified
What is capital gains tax?
Capital gains tax is levied on profits made on investments. It covers real estate, gold, stocks, mutual funds and various other financial and non-financial assets. It is broken down into Long Term Capital Gains Tax (LTCG) and Short Term Capital Gains Tax (STCG) depending on how long the investment in question has been held. Unlike income tax, the tax percentage does not change based on your overall tax bracket. The LTCG tax, excluding surcharge, on equity is the same for capital gains. ₹10 lakh or ₹10 crore. There is also a separate set of deductions that apply to LTCG, which do not apply to ordinary income.
Why is it so complicated?
Capital gains tax is complicated for a few main reasons. First, the rate changes from asset to asset. The LTCG tax on stocks and equity mutual funds is 10% but on debt mutual funds is 20% with indexation. Second, the holding period varies from asset to asset. The holding period for the LTCG tax is two years in real estate, one year for stocks, and three years for mutual funds and gold. Third, the exemptions available against this come with their own complex conditions. For example, buying a home after selling one may qualify for an exemption, but the new home must be purchased within two years or built within three years of the sale.
Is cryptocurrency taxed as capital gain?
The 2022 budget proposed a 30% tax on cryptocurrency, which is higher than capital gains tax in many cases. Also, under capital gains tax, investors can adjust profits and losses on different investments against each other or against future profits/losses. However, this cannot be done with cryptocurrency.
What distortions does it create?
Since capital gains tax is the same regardless of your overall income, it can make inequality worse. For example, a person with a salary of ₹40 lakh will pay 30% tax on it but only 10% LTCG tax on earnings from stock trading. A person with a salary of ₹5 lakh will pay 5% tax on it, but the same 10% LTCG tax on stock trading. Second, the shorter eligibility period of one year for equity LTCG compared to three years for debt mutual funds may encourage short-term equity trading.
What can be done to correct these anomalies?
The government can standardize the rates and holding periods for various assets. This will ensure that the taxation of one asset is not more attractive than another. A uniform and long holding period to qualify for the LTCG can also discourage short-term trading and speculative behavior in assets such as stocks. Exemptions for LTCG such as reinvestment in other real estate or capital gains obligations can also be simplified, with fewer conditions. Retail investors may also be relieved by reducing capital gains rates.
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