In simple terms, any profits or gains arising from sale/ transfer of a capital asset is termed as income under the head ‘capital gains‘.
Under the Income-tax Act, 1961, 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 asset. The calculation of capital gains on each type of capital asset has its own rules. Taxation of capital gains depends on the residential status of the individual taxpayer and period of holding (long-term or short-term). Therefore, it is very important to carefully analyse these factors to determine the correct amount of tax payable on capital gains.(Tax breaks, jobs or plan to beat China: What will Budget 2023 offer? Click to know)
The provisions in income tax laws governing capital gains tax are wide and varied and may get confusing for a common man. At present, there is no consistency in tax rates or holding period for calculation of capital gains on different types of capital assets falling within the same asset class.
Even the indexation benefit (which helps to lower the amount of capital gains by inflating the purchase cost to present value through govt notified Cost Inflation Index) is restricted to long term capital gains for specific capital assets. This leads to a lot of complexity in determining capitals gains tax payable on sale/ transfer of a capital asset. For example, in order to qualify as a long-term capital asset, holding period for different types of capital assets is as below:
|Type of asset||Holding period|
|Listed equity shares||More than 12 months|
|Equity oriented mutual fund units||More than 12 months|
|Unlisted equity shares (including foreign shares)||More than 24 months|
|Immovable assets (i.e. land and building)||More than 24 months|
|Movable assets (such gold, silver, paintings etc.)||More than 36 months|
|Debt oriented mutual fund units||More than 36 months|
Similarly, income tax rates applicable on profits or gains arising on sale/ transfer of capital assets and eligibility for indexation benefit differs for different types of capital assets. For example:
|Tax Type||Applicable tax rate without surcharge and cess||Eligible for indexation benefit|
| Long-term capital gains tax
(except on sale of listed equity shares/ units of equity-oriented mutual fund)
(except bonds and debentures which are not capital indexed bonds issued by the government or sovereign gold bonds issued by RBI)
| Long-term capital gains tax
(on sale of listed equity shares/ units of equity-oriented fund)
(on gains above Rs 1 lakh)
| Short-term capital gains tax
(when securities transaction tax is not applicable)
|As per taxpayer’s income tax slab (highest being 30% for residents)||No|
| Short-term capital gains tax
(when securities transaction tax is applicable)
As can be seen from the above tables, classification of capital assets into long-term and short-term, determining the eligibility for indexation and subsequently the rate at which taxes are to be paid is a tedious process.
The complexities are further increased depending on the residential status of the individuals since non-residents may be taxable at differential rates for certain capital assets and are also eligible to claim benefit under the tax treaties which India has with other countries.
For example, a non-resident 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 regime in India a complicated structure. The Revenue Secretary also recently commented that there is a need to simplify the capital gains tax regime in India. With the upcoming budget, the taxpayers would hope some of the challenges are addressed and provisions are simplified to reduce disparities.
What government can do to simplify capital gains taxation
Here are the steps government can take to simplify capital gains taxation:
a) The government may consider reducing the holding period of all equity shares and mutual fund units (whether listed or unlisted/ equity or non-equity) for qualification as long-term capital asset to 12 months.
b) Further, applicable tax rate on profit/ gains from sale of such long-term capital assets may be unified to 10% without giving the benefit of indexation.
c) The government may also increase the amount of profits/ gains which are not subject to tax since the exemption limit has not been changed (Rs 1 lakh) since its introduction in Finance Act 2018.
d) At present, movable assets such as gold, silver etc. qualify as long-term capital asset only if they are held for more than 36 months. This period of holding may be reduced to 24 months to bring these capital assets at par with immovable assets.
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, countries like Singapore, Turkey, China and Malaysia do not tax capital gains on sale of listed equity shares. Similarly, countries like the US, the UK, France and South Africa provide a concessional tax rate for taxing capital gains from sale of listed equity shares, debt oriented mutual fund securities and real estate.
For classification into long-term capital asset, countries like the UK, Canada, Denmark, Philippines and Indonesia do not prescribe any distinction or holding period specifications. Similarly, the US prescribes a holding period of six months to a year and France provides a period of two years and above for the asset to qualify as long-term.
To bring about rationalisation and simplicity, the government will need to consider its own objectives of boosting investment in India while reviewing the provisions for capital gains taxation in the upcoming budget.
(Views expressed are personal. Akshay Sharma, Senior tax professional, EY India contributed to this article.)