Rationalization in the long-term capital gains tax structure on the anvil

The Finance Ministry is seeking to streamline the capital gains tax structure over the long term by generating parity between similar asset classes and revising the base year for calculating the indexation benefit to make it more relevant, an official said on Friday.

Currently, shares held for more than one year are subject to a 10 percent tax on long-term capital gains.

Gains from the sale of real estate and unlisted stocks held for more than 2 years and debt instruments and jewelry held for more than 3 years attract 20 percent long-term capital gains tax.

The revenue department is now looking to streamline tax rates as well as the waiting period for calculating long-term capital gains and an announcement in the 2023-24 Budget is likely to be tabled in Parliament on February 1.

In addition, a change in the base year is being contemplated for calculating inflation-adjusted capital gains, the official added.

The index year for the calculation of capital gains tax is revised periodically to make it more relevant. The last revision took place in 2017 when the base year was updated to 2001.

Since asset prices increase over time, indexing is used to arrive at the inflation-adjusted purchase price of assets to calculate long-term capital gains for tax purposes.

“The whole effort is to make the capital gains tax structure simple and taxpayer-friendly and reduce the compliance burden. There is scope to achieve parity in tax rates and holding periods for similar asset classes the official told PTI.

Under the Income Tax Law, proceeds from the sale of capital goods, both movable and immovable, are subject to ‘capital gains tax’.

The Law, however, excludes movable personal property such as automobiles, clothing, and furniture from this tax.

Depending on the holding period of an asset, either short-term or long-term capital gains tax applies.

The Law establishes separate tax rates for both categories of earnings. The calculation method also differs for both categories.

Director of AMRG & Associates (Corporate and International Taxes), Om Rajpurohit, said that after 2004, several changes were made to the capital gains structure, which over time has become too complicated to understand due to different rates. and terms for various asset classes and investment methods. such as stocks, debt, mutual funds (ie growth-oriented, daily dividend, debt/stock-oriented), land and buildings, foreign stocks, etc.

“For simplicity, the asset class can be divided mainly into two parts, namely movable assets and immovable assets, and simultaneously define a single timeline in the holding period to consider short-term or long-term gain/loss.” added Rajpurohit.

(Only the headline and image in this report may have been modified by Business Standard staff; all other content is auto-generated from a syndicated feed.)

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