What the government can do to simplify capital gains taxation
a) The government may consider having a uniform holding period for all Indian domestic shares and mutual fund units (whether listed or unlisted/ equity or non-equity) for qualification as long-term capital asset.
b) The long-term capital gains tax rate can be aligned at 10% and short-term capital gains tax at 15% for all types of financial assets (such as listed and unlisted equity / preference shares, equity oriented mutual funds and instruments like REIT/Invit units and other financial assets like debt oriented mutual fund units, bonds, debentures).
c) Indexation benefit may not be needed for long-term capital gains on sale of financial assets if the tax rates and holding period are aligned.
d) Allow set-off of long-term capital loss with short-term capital gains.
Also Read: Income tax changes by Modi govt in last interim budget
The government may also analyse and consider the capital gains tax regime followed by other countries while framing policies for simplification of the tax structure in India. For instance, Singapore does not tax capital gains income in general unless the same qualifies as business/ trading income. Similarly, Malaysia also does not tax capital gains income in general unless it is from disposal of real property located in Malaysia and gains derived from the sale of shares in closely controlled companies with substantial real property interests. For classification into long-term capital asset, countries like Canada, Sweden and Denmark do not prescribe any distinction or holding period specifications to classify into long-term and short-term asset.
While we may see more impactful changes in the full budget which will be presented in July 2024, the government may still bring in some measures to simplify the complex provisions of capital gains taxation in the interim budget. It will not only ease the compliance burden on the taxpayers but may also result in higher levels of compliance from the taxpayers, thus, resulting in better revenue collection for the government. It could also lead to reduced litigation and administrative burden for the tax authorities.
What is capital gain?
In simple terms, capital gains mean any profits or gains arising from sale/ transfer of a ‘capital asset’ which is defined under the Income-tax Act, 1961 (Act). Under the Act, a ‘capital asset’ includes movable assets such as jewellery, archaeological collections and drawings, paintings etc. and immovable assets such as land and building. Shares, securities and units of mutual funds also qualify as movable capital assets. The capital gains tax calculation mechanism for each type of capital asset has its own rules and thus needs careful consideration by the individual taxpayers to correctly determine whether there is a profit or loss on sale of a capital asset and how much tax is payable in case of gains.
Changes in capital gains taxation in past budgets
In the past budgets, taxpayers have expected long overdue simplification and overhauling of capital gains tax structure in India. In recent years, the government has made few changes in the taxation of capital gains to plug revenue leakage. However, these changes have not fully simplified the overall structure of capital gains taxation. Few changes introduced in capital gains taxation in the last 5 years are summarized below:
| Year | Changes related to capital gains taxation |
| 2019 | (i)No capital gains tax if long-term capital gain amount on sale of residential property does not exceed Rs. 2 crores and investment is made in upto 2 residential house properties (ii)Short-term capital gains arising from transfer of units of Mutual Funds listed on a recognised stock exchange (RSE) which invest in other Mutual Funds listed on a RSE, will be eligible for concessional tax rate of 15% (subject to investment conditions being met by the Funds). |
| 2021 | Income earned on maturity of all Unit Linked Insurance Policies (ULIP) with annual premium exceeding Rs 2.5 lakh issued on or after 1 February 2021 were made taxable as capital gains |
| 2022 | Surcharge applicable on long-term capital gains capped at 15% on capital gains tax amount |
| 2023 | (i)Tax exemption available under Section 54 and 54F of the Act by re-investment of capital gains is restricted to Rs. 10 crore. (ii)Capital gains on sale of Market Linked Debentures (MLDs) or unit of Specified Mutual Funds acquired on or after 1 April 2023 will be treated as short-term gain, irrespective of period of holding, and will be taxable at slab rates applicable to the individual’s income and not beneficial tax rate applicable to long-term capital gains. Note: Specified Mutual Fund means any mutual fund where not more than 35% of its total proceeds is invested in the equity shares of Indian companies |
As evident from above, the changes have proved to be a mixed bag from an individual taxpayer’s perspective. While the upcoming budget in February 2024 is a ‘vote on account’ budget and may not tinker too much with the tax laws for individuals, one may still hope for some relief measures to simplify tax compliance for the common man.
What makes the capital gains taxation structure so complex is the analysis of multiple factors which is required to compute the capital gains amount and corresponding tax liability. This includes, amongst other factors: classification of capital assets into long-term and short-term depending on their period of holding from the date of acquisition, determining residential status of the taxpayer, analysing the mechanism to compute the cost of acquisition and applicable tax rate which apply to different categories of assets.
For example, gains on sale of unlisted equity shares qualifies as long-term capital gains if such equity shares are sold after 24 months from the date of acquisition and are taxable at 20% on the gain amount. Such gain amount is calculated by reducing the indexed cost of acquisition (i.e. enhanced purchase cost as per government defined factors) from the sale consideration received on sale of shares.
On the other hand, gains on sale of equity shares of an Indian company listed on a Recognised Stock Exchange qualifies as long-term capital gains if they are sold after 12 months from the date of acquisition and are taxable at 10% on the gain amount if the same exceeds Rs. 1 lakh. Such gain amount is calculated by reducing the actual cost of acquisition from the sale consideration (assuming shares were acquired after 31 January 2018).
The complexities are further increased if the taxpayer qualifies as a ‘Non-resident’ (NR) of India as per Section 6 of the Act as certain provisions related to NR taxation are different vis-à-vis a ‘Resident’. For example, a NR is required to pay taxes on long- term capital gains on sale of unlisted securities or shares at the rate of 10% without giving the benefit of indexation whereas a Resident is required to pay taxes at 20% after adjusting the purchase cost with indexation.
All these varied provisions make the whole capital gains tax structure in India rather complicated. The revenue secretary, in the past, has also commented that there is a need to simplify the capital gains tax structure in India. Thus, the common man remains hopeful that the upcoming interim budget might bring some relief to ease the analysis and compliance requirement for the taxpayers.
(This article is written by Shalini Jain, Tax Partner, People Advisory Services, EY India. Akshay Sharma, Senior Manager, EY India contributed to this article. Views expressed are personal.)