Capital gains tax rejig: Finance Minister explains Modi 3.0 govt’s rationale

Budget 2024: After new capital gains tax structure were proposed in the first Union Budget of the Prime Minister Narendra Modi-led government’s third term, Finance Minister Nirmala Sitharaman said most people will be better off under the new structure, and asserted that newly-formed government decided on the new structure after undertaking an elaborate exercise.“Most people will gain from the removal of indexation. Firstly, unlisted companies stand to hugely gain from this 20 per cent with indexation because their returns every year is generally more than 13 per cent- 14 per cent- 5 per cent. They have widely welcomed this move for removal of indexation. My strong belief is that even in real estate, a vast majority will actually benefit. What people are really looking at is that indexation has been removed, not at the reduction in the tax rate from 20 per cent to 12.5 per cent,” said the Finance Minister in an exclusive interview to ToI.

Further clarifying on rationale behind the move of the government, Sitharaman who presented her record-seventh Budget said that this perception that you will be at a disadvantage is not realistic, it’s absolutely not correct… “In almost every case people have a lower tax burden under this system. The small or the medium people who are going into the market or property investments are going to benefit from it,” Sitharaman told ToI in an interview.

In the full fledged-budget presented on July 23, the Finance Minister had announced a reduction in long term capital gains tax on property and gold from 20 per cent to 12.5 per cent, while withdrawing the benefit to adjust it for inflation. This came with the provision that indexation benefit will be available for properties bought up to 2001.

“This exercise should be seen as a rationalisation exercise. It’s a simplification exercise. Government has always endeavoured towards a simple tax regime, one that is easy to comprehend and easy to implement. In line with this vision, govt introduced GST. It was a monumental reform. Similarly, even on the income tax side, you have seen a number of measures for simplification that have been announced while some are in the pipeline, including the comprehensive review of income tax. Now, this is only one small measure relative to capital gains,” said the Finance Minister.

Budget 2024: Capital gains tax
The government in the budget proposed a revamp of the capital gains structure for financial securities. It rationalised long-term and short-term capital gain tax rates and tenures for shares — listed and unlisted — and other products.

The capital gains are classified as short-term or long-term based on the holding period of the capital asset. Talking on similar lines as that of Finance Minister, Revenue Secretary Sanjay Malhotra in an interview with ET said that vast majority of the cases they stand to gain because of the reduction. “Gains in real estate are more than 9% to 11% per annum. If that is the case for them they stand to benefit. Besides, tax kicks in only if the gains are not reinvested in a house. If you sell a house and you buy a house using only the gains, there is no taxation. Why should there be indexation for one class and not for another as inflation is felt by all asset classes. I think it is a move in the right direction,” said Malhotra.

(with ToI inputs)