How Budget 2023 may change taxes on your investments? Know here!

In simple terms, any benefit or gain that arises from the sale/transfer of a capital asset is called income under the heading 'capital gains'.

Under the Income Tax Law of 1961, capital assets include movable property such as jewelry, collections of antiques, drawings, paintings, etc., and fixed assets such as land and buildings. Stocks, securities, and mutual fund units also qualify as personal capital assets. Each sort of capital asset has its own guidelines for calculating capital gains. Capital gains taxes depend on the residential situation of the individual taxpayer and the holding period (long or short term). Therefore, before the Budget 2023 arrives, it is very important to analyze these factors carefully to determine the correct amount of tax to pay on capital gains.

The provisions of the income tax laws that govern capital gains tax are wide and varied and can be confusing to the common man. Currently, there is no consistency in the tax rates or the holding period for calculating capital gains on different types of capital assets that are within the same asset class.

Even the indexation benefit (which helps reduce the amount of capital gains by inflating the purchase cost to present value through a government-reported cost inflation index) is limited to long-term capital gains for specific capital assets. This leads to great complexity in determining the capital gains tax payable on the sale/transfer of capital assets. For example, to qualify as a long-term capital asset, the holding period for different types of capital assets is as follows:

Similarly, the income tax rates applicable to profits or gains derived from the sale/transfer of capital assets and eligibility for normalization benefits differ for different types of capital assets. For example:

As can be seen from the tables above, classifcation of capital assets into long and short-term, determining eligibility for indexation, and therefore tax payable rate is a tedious process.

The complexities increase depending on the residence status of individuals, as non-residents can pay taxes at variable rates on certain capital goods and are also eligible to claim benefits under the tax treaties India has with other countries.

For example, a non-resident must pay tax on long-term capital gains from the sale of securities or shares over the counter at a rate of 10 percent without granting an indexing advantage, while a resident must pay tax at 20 percent. Percentage after adjusting for the cost of purchasing indices.

All these various provisions make the entire capital gains tax system in India a complex structure. The Finance Minister also recently commented that there is a need to simplify the capital gains tax system in India. With the upcoming Budget 2023, taxpayers hope some of the challenges will be addressed and provisions simplified to reduce disparities.

What can the government do to simplify capital gains taxes?

Here are steps the government can take to simplify capital gains taxes:

a) The government may consider reducing the holding period of all shares and mutual fund units (whether listed or unlisted/equity or non-equity) to qualify as a long-term capital asset to 12 months.

b) In addition, the tax rate applicable to profits/gains from the sale of these long-term capital goods can be standardized at 10 percent without conferring a comparative advantage.