Budget heartburn: How many taxpayers actually declare capital gains?

However, data show the subsequent discourse has been disproportionate to the number of taxpayers likely to be impacted by the rule changes. In 2022-23, only about 4 million taxpayers declared any kind of capital gains income. That's barely 5% of all taxpayers.

The Budget set a uniform 12.5% tax rate on long-term capital gains (LTCG) for all assets, but it took away the benefit of adjusting the cost of a property for inflation (or ‘indexation’).

Under intense pressure, the government backed down. It has allowed taxpayers who bought a property before the Budget announcement the choice of paying tax under the old regime (20% tax rate with indexation benefits).

For stocks, though, the increase in LTCG remains. Finance minister Nirmala Sitharaman continues a shift set into motion by Arun Jaitley in 2018, when he introduced an LTCG of 10%, after 14 years of tax exemption.

Also read: Indexation benefit for property restored: But is it enough?

One reason for the increase in LTCG is galloping share prices in recent years. The government had every incentive to tax gains on the sale of stocks, mutual funds and other assets. 

Capital gains, both long- and short-term, have grown sharply. In 2022-23, income declared as LTCG was 7.3 times that declared as STCG (short-term capital gains). As a result, the share of capital gains in total declared income increased from 4.4% in 2019-20 to 11.6% in 2021-22, although it dropped to 9.5% in 2022-23.

Companies over individuals

But here’s the fine print. More than individuals, it’s non-individuals that are driving this surge in capital gains income. In 2012-13, about half of the capital gains income was declared by individuals. But in 2022-23, where the total capital gains pie had increased about 10-fold, the share of individuals had dropped to about 31%.

Also read: For property investors, one step forward and two steps back

Companies and other types of entities are increasing in prominence in this expanding pie. The share of companies has increased from 39% to about 49%. ‘Other taxpayers’—a set that includes limited liability partnerships (LLPs) and trusts—accounted for about 10% of capital gains declared, up from 0.2% a decade ago. 

In fact, the importance of capital gains as a source of income for companies has increased sharply in recent years. Since 2018-19, the share of capital gains in overall income declared by companies has almost doubled, from 7.6% to 13.7% in 2022-23.

Market moves

The jump in capital gains income for all classes of taxpayers has tracked the explosion in markets since covid. Between March 2020 (when covid-induced lockdowns started and markets fell sharply) and March 2023, the Nifty 50 surged 90%. By comparison, between April 2011 and April 2020, the index rose 55%. 

While the increase in the Reserve Bank of India’s real estate index has been more muted, the combined effect of increases in capital assets, especially stocks, has meant that investors have made a killing.

Also read: Reintroduced indexation for property disallows loss offsets, excludes NRIs

After doubling for two successive years, capital gains income declared in 2022-23 declined by 6%. In 2023-24, the difference between the lowest monthly average and the highest monthly average of Nifty 50 was 25%, against 15% in 2022-23. So, expect a jump in capital gains income to be declared for 2023-24 as well. But if the recent turmoil in the markets persists, capital gains income for 2024-25 could be muted.

Domain of few

Like all other categories of taxes, capital gains are highly skewed. In 2022-23, about 55% of the capital gains income declared by individual taxpayers came from just 30,608 individuals. That was about 0.4% of the base of individual taxpayers. 

These 30,000-odd individuals were the ones who declared capital gains income of ₹1 crore or more for that financial year. Of them, 14 individuals declared LTCG of ₹500 crore or more.

But overall, positive capital gains income, either long- or short-term, is declared by relatively few taxpayers. For 2022-23, about 71 million out of 75 million individual taxpayers (95%) declared no capital gains income at all. Among companies, 97% declared no capital gains income. Among HUFs (Hindu undivided families), this share was 92%.

Yet, the Budget move sparked a storm, which has now settled after a rollback.

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