As this year’s final budget nears, taxation changes to relieve citizens and stimulate consumption are a subject of speculation. A focus area that awaits attention, though, is India’s capital gains tax regime. While changes have been made, it remains complex and unfair.
The rates of this tax differ by asset classes, while it also lacks consistency across investments in the way its short-term version is levied more heavily than the long-term kind. Gains from the sale of listed shares or equity mutual funds held for less than 12 months, for example, are classified as short-term, and as long-term beyond that period; the applicable rates are 15% and 10% respectively, with the latter tax kicking in if annual gains exceed ₹1 lakh.
In contrast, gains on debt mutual funds are taxed at the marginal rate of income tax, regardless of how long they are held. And in the case of real estate, the cut-off is two years, with capital gains taxed at the marginal rate of income tax in case property is sold within that span, and at 20% (after adjusting for inflation) if it’s held longer.
Also, this tax can be avoided by reinvesting the proceeds in another property. Equity investors, however, must pay up even if they are only using the money to shuffle their portfolio. Holders of physical gold, meanwhile, must hold this metal for three years for their gains to qualify as long-term.
Each rule may have had a reason, but taken together, their variation makes investment planning painful for those who brave it on their own. Since all taxation should go by the cardinal principle that people should easily be able to work out their liability, it’s time to simplify the regime.
Rate variation serves as a device to alter investment incentives, no doubt, but the only aspect of it that’s easily justified is the heavier burden placed on quicker buying and selling. Speculators paying more is a well-accepted practice, though what counts as short-term should be the same for all avenues.
Varied rates across asset classes are harder to explain, since their specific policy aims must outweigh the hidden ill-effects of distorted investment flows overall. The government has lately sought to end anomalies. Debt mutual funds, for instance, no longer enjoy a sweet deal if held long-term.
While they have been brought at par with fixed deposits held with banks—which, like share dividends, are also taxed at the marginal rate—we find that investors don’t have it any easier when it comes to picking assets. Consider the complexity faced by gold investors.
Also read: Income tax implications of trading in shares and F&O explained
Gains made from gold exchange-traded funds (ETFs) bought after 2023-24 began are taxed at the marginal rate. All gains on physical gold sold within three years are treated the same, but a rate of 20% (with inflation adjustment) applies if liquidated later.
Plus, capital gains on sovereign gold bonds are exempt from tax if held for their full eight-year tenure. Sure, stoking demand for paper gold can help contain our bullion imports, but why treat gold ETFs differently?
India’s capital gains tax regime needs an overhaul aimed at simplicity, uniformity and fairness. For a non-distortive system that eases investment choices, we could treat all short-term holdings apart from long-term with a common cut-off of one year (and inflation adjustment for a half-decade span or more) and apply the same rates for both across asset classes.
Changes may pose a challenge if their impact needs to be revenue neutral. But over time, a regime that’s easier to follow will surely enthuse more investors and pay off fiscally.