Types of capital assets
Capital assets are classified as short-term or long-term based on their holding period. Different holding periods have been specified for various capital assets for such classification. Listed equity shares are classified as short-term if they are held for not more than 12 months prior to the date of transfer, whereas unlisted equity shares including shares of foreign entities are classified as short-term if they are held for not more than 24 months.
While units of equity oriented mutual funds are classified as short-term if they are held for not more than 12 months, units of debt oriented mutual funds are classified as short-term if they are held for not more than 36 months.
Immovable assets (i.e. land and building) are classified as short-term if they are held for not more than 24 months. Moveable assets such as jewellery are classified as short-term if they are held for not more than 36 months.
Thus, different types of capital assets have different holding period to categorise them into short-term and long-term which ultimately impacts the tax rate which is applicable on transfer of the capital asset.
Changes the government may consider in Budget 2024:
The government may consider introducing a uniform holding period, such as 12 months, for all securities whether listed, unlisted, debt or equity for classification as short-term or long-term capital asset. The government may also consider introducing a uniform holding period of 36 months for classification of all immovable and moveable assets other than securities.
Method of computation of taxable capital gains and tax rates applicable
Taxable capital gains are computed by reducing the cost of acquisition from sale consideration of the capital asset. With regard to the method of computation of taxable capital gains, the income-tax law provides for indexation of the cost of acquisition in relation to certain long-term capital assets based on Cost Inflation Index notified by the government annually. No indexation benefit is applicable in computing short-term capital gains.
Further, the tax rates applicable depend on the type of capital asset (whether long-term or short-term), nature of the capital asset (whether listed securities, unlisted securities, immovable property etc.) and also the residential status of the taxpayer (whether resident or non-resident).
Different methods of computation of the taxable gains and different tax rates applicable to various assets depending on type and nature of assets, results in computation mechanisms that are tedious, particularly in relation to long-term capital gains arising from transfer of securities.
Long-term capital gains from transfer of listed equity shares or units of equity oriented mutual funds, exceeding Rs 1 lakh, are taxed at 10 percent plus applicable surcharge and cess without indexation.
For gains arising to a resident from transfer of securities other than equity shares or units of equity oriented mutual funds, indexation benefit is available, and the resultant gains are subject to tax at 20 percent plus applicable surcharge and cess. Whereas, in case of a non-resident, long term capital gains arising from unlisted shares is taxed at 10 percent plus applicable surcharge and cess without the benefit of indexation.
Change the government may consider in Budget 2024:
To simplify the provisions and reduce disparities, the government may consider taxing all long-term capital gains arising from transfer of securities, whether listed, unlisted, debt or equity, at 10 percent plus applicable surcharge and cess without benefit of indexation irrespective of residential status of the taxpayer.
Exemption limit for long-term capital gains from transfer to listed equity shares and units of equity mutual funds
Long-term capital gains arising from transfer of listed equity shares and units of equity oriented mutual funds are not taxable up to Rs 1 lakh.
Change the government may consider in Budget 2024:
The government may increase the amount of capital gains which are not subject to tax since the limit of Rs 1 lakh has remained unchanged since its introduction in the Finance Act, 2018. The Central Board of Direct Taxes (CBDT) has enhanced the reporting in Annual Information Statement (AIS) of a taxpayer to also include details of sale of capital asset made by the taxpayer during the year. For capital market transactions, AIS also reports cost of acquisition of the capital asset in some cases which makes the compliance easier for a taxpayer by providing all the information in a single statement. However, the taxpayers would be expecting necessary changes in the capital gains structure from the upcoming budget to simplify the varied and complicated provisions which will help them to better understand the classification of assets, computation mechanism and taxability of capital gains, thereby enabling ease of compliance and appropriate disclosures in the tax returns.
(Views expressed are personal. Meena Narayanan, Director, EY India also contributed to this article.)