Image for representational purpose only. , Photo credit: Shiv Kumar Pushpakar
The finance ministry is considering revising the base year for computing indexation gains to rationalize the long-term capital gains tax structure by bringing parity among similar asset classes and make it more relevant, an official said on Friday.
Currently, long-term capital gains on shares held for more than a year are taxed at 10%.
Sale of immovable property and unlisted shares for more than 2 years and debt instruments and jewelery held for more than 3 years attract long-term capital gains tax of 20%.
The Department of Revenue is now considering rationalizing the tax rates as well as the holding period for computing long-term capital gains and is likely to announce the same in the Budget 2023-24 to be presented in Parliament on February 1. .
The change in the base year for computing inflation-adjusted capital gains is also being considered, the official said.
The index year for capital gains tax calculation is revised from time to time to make it more relevant. The last revision took place in 2017 when the base year was updated to 2001.
Since property prices rise over time, indexation is used to arrive at the inflation-adjusted purchase price of the property to calculate long-term capital gains for the purpose of taxation.
“The whole effort is to make the capital gains tax structure simple and taxpayer friendly and reduce the compliance burden,” the official said. There is scope to bring uniformity in tax rates and duration for similar asset classes.
Under the Income Tax Act, gains from the sale of capital assets, both movable and immovable, are subject to ‘capital gains tax’.
However, the Act excludes movable personal property such as cars, apparel and furniture from this tax.
Depending on the period of holding the asset, either long-term or short-term capital gains tax is levied.
The Act provides for different rates of taxes for both the categories of benefits. The method of calculation is also different for both the categories.
Om Rajpurohit, director (corporate and international tax), AMRG & Associates, said that after 2004, several changes were made in the capital gains structure, which over time led to different rates and time limits for different classes of assets and investments. The reasons have become too complex to understand. Such as equity, debt, mutual funds (ie growth oriented, daily dividend, debt/equity oriented), land and building, foreign shares, etc.
“For the sake of simplicity, the asset class may be broadly divided into two components, viz., movable assets and immovable assets, as well as on the period of holding to consider short term or long term gains/losses. Defining the timeline,” Mr Rajpurohit added.