With Nirmala Sitharaman all set to present the Budget 2023 on 1 February, people have sky-high expectations from the government on a number of issues. One such topic is capital gains tax, which is levied on the sale/transfer of any capital asset. Under the Income-tax Act, 1961, a capital asset includes paintings, drawings, jewellery, archaeological collections, securities, shares, and units of mutual funds. The capital asset also includes immovable assets like buildings and land. The provisions in the income tax laws that govern the capital gains tax are varied and wide and may confuse an individual. Currently, there is no consistency in the tax rates or holding period to calculate the capital gains on different kinds of capital assets that fall within the same asset class. The indexation benefit is also restricted to the long-term capital gains (LTCG) for specific capital assets.
This causes a lot of complexity to determine the capital gains tax payable on the sale/ transfer of a capital asset. The rules for the calculation of capital gains on each type of capital asset are different. For example, while Equity oriented mutual fund units and stocks must be sold after being held over 12 months to qualify as a long-term capital gains asset, for debt-oriented mutual funds and movable assets like gold and silver, the holding period must be over three years.
Taxation of capital gains is dependent on the individual taxpayer’s residential status and period of holding, be it long-term or short-term. Hence, it is crucial to properly analyse these factors for determining the correct amount of tax payable on capital gains.
Revenue Secretary, Tarun Bajaj, had told CNBC-TV18 earlier, “Our capital gains tax regime is very complicated. It needs simplification. I have said this and I am repeating it again.” According to Bajaj, the policymakers have received some proposals to simplify the capital gains tax structure, and it is for the government to decide if they wish to implement the changes in the Budget for 2023-24.
According to reports, here is what the Centre can do for simplifying capital gains taxation:
- The government can raise the amount of profit which is not subject to tax. The exemption limit has not been revised (Rs 1 lakh) since its introduction in Finance Act 2018.
- The government can reduce the holding period for long-term capital assets such as mutual fund units and equity shares, whether listed or unlisted/ equity or non-equity, to 12 months.
- Further, the applicable tax rate on profit from the selling of such long-term capital assets can be unified to 10 per cent without providing the benefit of indexation.
- Currently, movable assets like gold and silver qualify as long-term capital assets only if they are held for more than 36 months. This holding period can be reduced to 24 months for bringing these capital assets at par with the immovable assets.