Capital Gains: What to expect? How can taxation be improved?

Are you looking forward to the upcoming Indian Union Budget 2023? If so, there are many things you may want to keep in mind. Capital gains taxation in India has been a topic of discussion for a while now, and it seems that many changes are set to be made. 
The upcoming Indian Union Budget 2023 will majorly impact investors in India. You must know what to expect if you are planning to make any money in the country soon.

What are capital gains?

Capital gains refer to the profit from selling an asset, such as a stock, bond, or real estate. The taxation amount you will pay on capital gains completely depends on the asset type, how long you hold it, and the tax slab you fall in. In India, long-term capital gains (assets held for more than 12 months) are taxed at a lower rate than short-term capital gains (assets held for 12 months or less).

How are capital gains taxed in India?

In India, taxation on capital gains is based on the asset type and the asset's holding period. 

For example, if individuals sell a property they have held for more than 24 months, the gains from that sale are considered long-term capital gains. They are taxed at 20% with the indexation benefit. If individuals have held the property for less than 12 months, the gains from the sale are considered short-term capital gains. And taxation on this will depend on the individual's slab rate.

Gains from shares held for less than 12 months are considered short-term capital gains and are taxed at the individual's slab rate. 

Similarly, gains from the sale of equity shares or equity-oriented mutual funds held for more than 12 months are considered long-term capital gains. They are taxed at a flat rate of 10% without the indexation benefit.

In the case of debt-oriented mutual funds, the holding period for long-term capital gains is 36 months, and the tax rate is 20% with an indexation benefit.

The Indian Income Tax Act also provides certain capital gains exemptions and deductions. For example, suppose an individual reinvests the capital gains from selling a residential property in another property within a specified period. In that case, the capital gains may be exempt from tax. 

Similarly, capital gains on the transfer of agricultural land are also eligible for exemptions under certain circumstances.

What to Expect from the budget 2023?

Currently, long-term capital gains on equity shares and equity-oriented mutual funds are taxed at 10% without the benefit of indexation. In comparison, short-term capital gains are taxed at 15%. For other assets, long-term capital gains are taxed at 20% with indexation benefit, and short-term capital gains are taxed basis on slab rate. 

It is very difficult to understand the current structure of capital gains tenure, and taxation. A simplified capital gains tax structure and uniform tenure may be part of the government's 2023 budget.

How Taxation of Capital Gains Can Be Improved

In order to make the capital gains tax system more fair and efficient, several changes can be made. The following are some of them:

1. Providing more clarity and consistency in the tax structure: The current tax structure is complex and difficult to navigate. Providing more clarity and consistency would make it easier for an individual to understand and concede to the rules.

2. Increase the holding period for long-term capital gains: Increasing the holding period for long-term capital gains from 36 months to a longer period, such as 48 or 60 months, would promote long-term investments and discourage short-term speculation. It would align with the global best practices and bring India in line with other major economies, such as the United States and Canada.

3. Increase the threshold for tax exemptions: Currently, a threshold of Rs. 1,00,000 is applicable for long-term capital gains, which can be increased to provide relief to taxpayers with small gains. It would relieve small investors and encourage more participation in the capital market.

4. Indexation benefit: The indexation benefit can be increased or made more widely available to provide relief to taxpayers.

5. Provide Capital loss carry forward: Capital loss carry forward allows taxpayers to offset capital gains with capital losses from previous years, but it has limits on how much you can offset each year. Increasing the limit could allow taxpayers to offset more gains, reducing the overall tax burden.

6. Tax rates for capital gains should be unified across different asset classes: Currently, the tax rates for long-term capital gains vary across various asset classes, such as equity shares, mutual funds, and property. Harmonizing the tax rates across asset classes would provide a level playing field for investors and encourage investment in a wider range of assets.

The Bottom Line

Capital gains taxation is a complex tax regime that includes different aspects, such as when and how gains are taxed and the various available exemptions. The complexity of capital gains tax structure has always been a discussion topic. 

Let us see if the government comes with a simpler tax structure and simplifies individuals' capital gains taxation journey.