Budget 2020: Booster likely for capital gains on property and equity

In what is being billed as a make or break Budget to revive the economy, the Modi government is likely to introduce heavy duty measures for rationalization of key equity taxes, including scrapping capital gains on sale of property, shifting the tax applicability of dividend distribution tax (DDT) to the receiver and extending the timeline of long term capital capital gains (LTCG) tax from the current 12 months to 24 months.

The breakthrough measure, if it materializes, will be doing away with capital gains on sale of property. The move has the potential to revive the real estate sector which is in the doldrums and facing immense stress.

The government is considering a proposal to do away with capital gains on selling of property. Currently, one has to pay 30 per cent capital gains on the sale of a property, if the property holder doesn't re-invest it back in property within 3 years.

If property is sold within 24 months, one has to pay a short term capital gains tax (STCG) on the gains as per an individual's income-tax slab.

After 24 months, one has to pay an LTCG tax, which is charged at 20 per cent with indexation benefits. Section 54 gives an exemption if there is sale of a property and then another one is bought.

This exemption under section 54 is available when the capital gains from property sale are reinvested into buying or constructing maximum two houses.

However, the capital gains on the sale of house property must not exceed Rs 2 crore in order to claim exemption for reinvesting in two properties. This benefit can be claimed only once in the lifetime.

The exemption will be reversed if this new property is sold within three years of purchase and capital gains from sale of the new property will be taxed as short-term capital gains. The new properties must be purchased either one year before the sale or two years after the sale of the property. Alternatively, the new residential properties must be constructed within three years of sale of the property.

DDT

In addition, the government is likely to change the applicability of dividend distribution tax (DDT) by shifting the tax liability from dividend issuer or the company to the receiver.

Currently, dividend distribution tax is levied at an effective rate of 20.56 per cent on the company declaring dividends. This is over and above the corporate tax. Apart from this, resident non-corporate taxpayers need to pay 10 per cent tax on dividends in excess of Rs 10 lakh a year. The DDT was introduced for more efficient collection of dividend tax from the companies rather than shareholders.

LTCG on equity

In a move that will fire up the stock markets, the government is likely to extend the timeline of long term capital gains (LTCG) on shares from the current 12 months to 24 months.

Currently, LTCG of 20 per cent is paid by domestic investors if they hold equity for 12 months, and 10 per cent is charged to non-residents if they hold equity for 12 months.