Many investors keenly follow the tabling of Union budget in Parliament, but this year the interest will be greater than usual. There are hopes that Finance Minister Nirmala Sitharaman will introduce measures to revive the economy and put it on a rapid growth path. Further, investors are also hoping that some of the investor-unfriendly measures introduced in the past few years will be rolled back. Here are some proposals that can help boost investor confidence.
Remove tax on dividends
Dividends from stocks and mutual funds were tax free till last year; however, Budget 2020 brought them within taxable income. Now, all dividends received are added to the income of the individual, taxed at the applicable slab rate, making compliance more cumbersome. This has been a dampener for many investors who relied on dividends for a tax-free receipt. Investors in the higher 30-40 percent tax brackets are particularly hit by this measure. If the tax on dividends is rolled back, it will be beneficial for the market as a whole. Dividends are, in any case, declared out of post-tax income of a company.
Higher threshold for capital gains tax
Long-term capital gains (LTCG) from equity instruments were tax-free till three years ago, but made taxable at 10 per cent beyond Rs 1 lakh. In a relief for equity investors, LTCG may be completely removed or at least the threshold increased to Rs 3 lakh.
As a quid pro quo, the minimum holding period for long-term gains can be extended from one year to two years. Further, those long-term investors who don’t claim Rs 1 lakh exemption every year, should be allowed to carry forward the unclaimed exemption for up to five financial years. This measure will also do away with the need for periodic booking of profits to avoid a higher tax in future, thus encouraging long-term investors.
Also read: Budget 2021: What tax experts, insurance companies and mutual funds want
Tax exemption for switching from MF schemes
We often advise mutual fund investors to switch from poorly performing schemes to better ones, but such switching is taxed. There is no tax however, when an investor switches from one fund to another in a ULIP, a pension plan or the NPS.
Similarly, if debt funds and conservative hybrid funds are sold before three years, the gains are added to the investor’s income and taxed according to the slab rate. After three years, the gains are taxed at 20 percent after indexation. For equity funds or aggressive hybrid funds, short-term gains are taxed at 15 percent. After one year, gains of up to Rs 1 lakh are tax free and beyond that are taxed at 10 percent.
Gains from switching should not be taxed. This relief will provide a level-playing field to mutual fund investors and boost investment activity.
One investment, one tax rate
There are a few other anomalies in the way different investments are taxed. If stocks and equity funds are held for one year, the gains are long term capital gains. In the case of real estate, this minimum holding period is two years. For gold ornaments, gold funds and debt funds, this period is even longer, at three years. There is disparity in tax treatment even within the same asset class. Long-term capital gains from gold ornaments, bars, coins and gold funds are taxed at 20 percent with indexation, while gold bonds held till maturity are tax free. Even if these bonds are sold before maturity, the tax is only 10 percent without indexation. The budget should remove these complications and rationalise the capital gains tax structure to ease tax compliance for individuals.
In conclusion, removing (double) taxation on dividends and reducing anomalies on holding period and/or tax rates will go a long way in instilling more confidence in the investing community and in generally lifting the market sentiment.
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