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Business News/ Money / Personal Finance/  Budget 2024: What are capital gains taxes and are they expected to see any changes tomorrow?
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Budget 2024: What are capital gains taxes and are they expected to see any changes tomorrow?

As the Interim Union Budget looms on the horizon, investors are keenly anticipating updates regarding capital gains taxes—a critical area of interest. They are eager to discern if FM Sitharaman will make further modifications to these taxes. Let's see what experts expect.

Capital gains taxes play a significant role in shaping investment decisions and financial planning in India. (Mint)Premium
Capital gains taxes play a significant role in shaping investment decisions and financial planning in India. (Mint)

As the Interim Union Budget looms on the horizon, investors are keenly anticipating updates regarding capital gains taxes—a critical area of interest.

In the previous budget, adjustments were introduced, leaving both experts and investors eager to discern if Finance Minister Nirmala Sitharaman will make further modifications to these taxes in the forthcoming budget. 

The anticipation revolves around potential shifts that could impact investment strategies and financial planning, underscoring the importance of monitoring any developments in the realm of capital gains taxes.

But first, let's understand what capital gains taxes are.

Capital gains taxes play a significant role in shaping investment decisions and financial planning in India. Capital gains refer to the profits earned from the sale of capital assets, such as real estate, stocks, mutual funds, and other investments. In India, these gains are categorised into short-term and long-term gains, each attracting different tax rate.

For instance, suppose a mutual fund unit is bought at 1,000 and sold at 1,100. Then the profit of 100 is your capital gain, however, if it is sold at 900, the loss of 100 is called capital loss.

Read here: Budget 2024: Crypto industry players want 1% TDS to be slashed

Short-Term Capital Gains (STCG) are for assets held for less than 36 months and are considered short-term. These are usually taxable at the individual's applicable income tax slab rate. Meanwhile, Long-Term Capital Gains (LTCG) are for assets held for 36 months or more and are considered long-term. These are usually taxable at a flat rate, often with indexation benefits for certain assets.

"However, in respect of certain assets like shares (equity or preference) which are listed in a recognised stock exchange in India…, units of equity oriented mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months," as per the Income Tax Department rule.

What changes were made in the previous budget?

In the last budget, the government removed the benefit of indexation and LTCG for non-equity mutual funds. The new rule came into force on April 1, 2023.

According to the latest amendment, the debt funds that are purchased after April 1, 2023, and sold after three years, the gains accrued will be treated as short-term capital gains and will be added to the taxable income. Until now, they were considered long-term capital gains and after indexation, a 20 percent tax was levied.

Read here: Budget 2024: Mutual fund industry players expect these reforms from FM

Indexation is a process where the purchase cost of MFs is adjusted on the basis of inflation. So, the overall purchase cost of MF units will be calculated higher depending on the rise in inflation which then decreases the overall capital gains, and hence the taxes levied will also be reduced.

Are there any changes expected in the capital gains taxes in the upcoming budget?

Most experts believe that since this is the Interim Budget, no major announcements are likely and hence, they do not see the FM revising these taxes to any extent in the upcoming budget. However, experts remain divided on the various aspects of capital gains taxes.

Sunil Nyati, Managing Director, Swastika Investmart

I anticipate that the government's primary emphasis will persist in fostering economic growth through increased capital investment and infrastructure development. The capital market is currently experiencing robust momentum, and I express the hope that the government refrains from implementing policies that might disrupt the positive market sentiment. Simultaneously, I advocate for a reconsideration of the removal of either Long-Term Capital Gains (LTCG) or Securities Transaction Tax (STT) to provide further support to the equity culture in India.

Read here: Can fiscal consolidation reassure investors and boost market sentiment?

Hemant Sood, Managing Director of Findoc

As there is a positive rally in the market, long-term tax which is 10 percent would come into play and increase government revenue. The revenue that the government possesses through these taxes could act extremely beneficial for the country which is further used to enhance infrastructure, tourism in our country to simultaneously boosts employment. Henceforth, the government is unlikely to enact any changes to the capital gains taxes.

Sapna Narang, Managing partner, Capital League

Taxation rules for debt mutual funds were changed last year, starting 1 April’23. Now, returns from debt instruments like FDs, Debt MF, Bonds, and NCDs are all taxed at the slab rate for investors. Thus, aligning taxation of all debt instruments. Short-term gains on equity are taxed at 15 percent, and long-term capital gains (above one year) on equity and equity MFs are taxed at 10 percent without indexation. The government would want to continue to draw in long-term capital to equity markets, and thus, incentives in the form of lower taxes compared to debt investments are likely to continue. We do not expect any changes in taxation on equity or debt gains in this budget.

Read here: Budget 2024: ICRApredicts these changes for markets, mutual funds and taxation

Puneet Mishra, Partner, M&A Tax & Regulatory Services, BDO India

Capital gains require an overhaul. Currently, capital gains are taxed as long-term or short-term based on their holding period, and the tax rates on these capital gains vary, creating complexity. Rationalising and standardising the capital gains regime with regards to certain aspects e.g., streamlining of the holding period i.e. long-term or short-term, uniformity in long-term/short-term tax rates across various asset classes, a change in the base year for indexation for long-term capital gains, etc. would be favourable to the investor community at large. Aligning these changes with the visions of the government for encouraging taxpayer-friendly initiatives such as common income-tax return forms, annual information statements, etc. could enhance overall compliance.

 

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.

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Published: 31 Jan 2024, 11:47 AM IST
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