Market participants believe that announcements related to Long Term Capital Gains (LTCG) tax would be watched out keenly when the Finance Minister tables her Union Budget for 2024-25 on July 23.
This is in line with a pre-budget survey of 78 CEOs across sectors conducted by Moneycontrol in association with Deloitte, which revealed that most CEOs are keeping their fingers crossed on announcements about a uniform capital gains tax regime with streamlined holding periods.
The Association of Mutual Funds in India (AMFI), the industry body of mutual funds, as part of its pre-budget proposals, recently suggested the government that LTCG on listed equity shares or units of equity-oriented fund schemes held for more than one year and up to three years be subjected to LTCG tax at the rate of 10 percent on capital gains exceeding Rs 2 lakh in a financial year.
Further, gains from such assets if held for more than three years should be exempted from capital gains tax, it proposed.
Hitesh Thakkar, acting CEO of ITI AMC, highlighted that the quantum of retail participation in the mutual funds industry has been on a steady rise through the last 3-4 years and hence the industry is advocating for a reduction in capital gains tax on mutual funds so that the trend is further strengthened in the coming years.
“The growing penetration of mutual funds among retail investors, particularly in the middle and higher middle-income groups, suggests that tax incentives could further attract these investors,” Thakkar explained.
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He added that India's strong economic indicators such as high GST collections, increased government revenue, and projected corporate earnings growth of 15-17 percent over the next two years make this an ideal time to implement such incentives as encouraging investment in mutual funds would benefit retail investors and enhance their investment experience.
DP Singh, joint chief executive of SBI AMC, however, told Moneycontrol that since capital gains tax is paid only when profits are realised, no major changes can be expected. “From a global perspective, our system is very attractive to investors,” Singh said.
He, however, highlighted the mutual fund industry's requests regarding capital gains on the fixed income side.
“If someone invests directly in debentures and long bonds, it's attractive, but if done through a mutual fund, it is taxed at a marginal rate. The industry wants this to be taxed at 10 percent, similar to bonds, instead of the current rule where it is taxed at the marginal rate without indexation,” said Singh.
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Capital Gains Tax is a levy on the profit earned by investors on the sale of an investment, which could be stocks or property. Around 38 percent of respondents suggested implementing uniform tax rates for long- and short-term capital gains to simplify the regime, indicating a desire for clarity and simplicity in tax calculations.
Additionally, 28 percent advocate for streamlining holding periods, suggesting a need for clearer guidelines to determine tax liabilities based on asset holding durations.
Feroze Azeez, Deputy CEO of Anand Rathi Wealth, also told Moneycontrol that they are not expecting much change in the capital gains taxation.
“LTCG from listed equity or equity mutual funds are exempt for the first Rs 1 lakh. This limit has remained unchanged for the last five years. To encourage larger equity participation, the government could consider increasing this limit to Rs 1.5 lakh or Rs 2 lakh,” he said.
Azeez suggested several measures to make the capital gains tax regime more efficient, including standardising the holding period for an asset to be classified as long-term across all asset classes and allowing the set-off mark for long-term capital losses against short-term capital gains.
The capital gains tax in India is now based on the holding period and asset type. For equity and equity-oriented mutual funds, long-term capital gains (LTCG) of over Rs 1 lakh is taxed at 10 percent after a 12-month holding period, while short-term capital gains (STCG) is taxed at 15 percent.
For debt mutual funds and other non-equity investments, LTCG after 36 months is taxed at 20 percent with indexation, and STCG is taxed as per income tax slabs.
Real estate and unlisted shares have different holding periods and rates. Exemptions are available under specific conditions. Securities Transaction Tax (STT) applies to all equity transactions. STT is a direct tax levied on every purchase and sale of securities that are listed on the recognised stock exchanges in India.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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