Budget 2024: Industry hopes for capital gains tax relief from Centre

With the first full Budget of the Narendra Modi-led National Democratic Alliance (NDA) 3.0 set to be presented later this month, investors are eagerly anticipating potential relief on capital gains taxes, according to a report by Moneycontrol. 

Various assets, such as equities, debt instruments, and real estate, are taxed at different rates and for different holding periods, which classify the gains as either short-term or long-term.

As per the Income Tax Act, gains from selling both movable and immovable capital assets are subject to ‘capital gains tax’.

What is expected from the Budget 2024?

Capital gains taxes can range from 10 per cent to as high as 30 per cent, depending on the holding period, which spans from one to three years. The news report, citing experts, indicated that rationalising and standardising the capital gains tax regime — by streamlining holding periods, ensuring uniformity in long-term and short-term rates across asset classes, and updating the base year for indexation — would significantly benefit investors.

 

There are expectations that the capital gains tax structure will be simplified, potentially introducing a uniform holding period for domestic equities and mutual funds, the report noted. This uniformity could enhance compliance by providing consistent tax treatment.

Currently, direct investments in listed debt securities and zero-coupon bonds (whether listed or unlisted) are considered long-term if held for more than 12 months. Conversely, investments through debt-oriented mutual funds require a holding period of 36 months to be classified as long-term.

In 2018, Finance Minister Arun Jaitley reintroduced a 10 per cent Long-Term Capital Gains (LTCG) tax on gains exceeding Rs 1 lakh, without allowing indexation benefits. Before this, in 2004, the then Finance Minister P Chidambaram had made LTCG tax-exempt while maintaining the Securities Transaction Tax (STT), which is imposed on all stock exchange transactions.

What is the current scenario of Capital gains Tax?

Data from the financial year 2023-24 shows that the government earned Rs 9,72,224 crore (net of refund) from STT, while LTCG collections are estimated to be significantly lower, the report highlighted. Ahead of the recent general elections, there were speculations that the government might consider uniform treatment for all asset classes. However, the Finance Ministry has dismissed these reports as speculative.

The report said that the mutual fund industry believes that the government, given the current political climate, might avoid making any drastic changes that could unsettle investors. Presently, selling listed securities such as shares and units of equity-oriented mutual funds within a year incurs a 15 per cent Short-Term Capital Gains (STCG) tax. If these securities are sold after a year, a 10 per cent LTCG tax is applied on gains exceeding Rs 1 lakh per year.

According to amendments to the Finance Bill in March 2023, gains from debt fund investments with less than 35 per cent equity exposure do not qualify for LTCG and indexation benefits. Regardless of the holding period, these gains are taxed at income tax rates. Previously, gains from debt funds held for over three years were taxed at a 20 per cent LTCG rate after indexation.

Moneycontrol reported that industry experts are hopeful for some relaxation in the LTCG front, which could foster a more favourable investment environment.