A marginal increase in long-term capital gains (LTCG) tax on listed equity, which is a “passive income”, is justified in view of the salary, business and rental income being taxed at a much higher rate, Revenue Secretary Sanjay Malhotra said.
Defending the removal of indexation benefits from LTCG on real estate, he said other asset classes, including incomes from shares, interest and fixed deposits do not enjoy the same benefit, and the move should be seen as a simplification measure.
“The income tax rates on salary income, business income or rental income are higher. On this passive income, the LTCG tax was only 10 percent, is it justifiable? This is a very marginal increase which will impact only people with a higher income as per our study,” Malhotra told Moneycontrol in an interview. “There is no need to rethink the LTCG. It’s a minor increase which the capital markets have absorbed."
The Union Budget for 2024-25 announced a 12.5 percent long-term capital gains tax (LTCG) on all financial and non-financial assets. The proposal raised the tax rate by 2.5 percent for listed equity from 10 percent and reduced the tax rate by 7.5 percent for real estate, but without indexation benefits. Indexation adjusts the purchase price of the asset for inflation, and, hence, reduces the taxable capital gains.
As much as 61 percent of the long-term capital gains tax comes from people with an income of more than Rs 1 crore and 88 percent LTCG is received from people with more than Rs 15 lakh income. Similar is the trend seen for short-term capital gains tax, he said.
“So, to the extent that there is an increase in the taxation rate there is also an increase in the exemption limit for lower income categories. It doesn’t impact the people in lower income groups below Rs 15 lakh much,” he said.
The exemption under capital gains tax on listed equity and equity-oriented mutual funds has been increased to Rs 1.25 lakh from current Rs 1 lakh.
These measures should be seen more towards simplification which people have been asking for years, he said.
LTCG on real estate
Defending the removal of indexation on real estate, Malhotra said the same benefit is not enjoyed for income from shares, interest or fixed deposits. “I would like to ask this question to those who are asking for indexation on LTCG in real estate, why don't they ask for indexation for shares, interest incomes and fixed deposits? What happens to other asset classes? We don’t ask for indexation there? In LTCG on real estate, any property sale to buy another house is exempted. If one is not investing in another house, why should it not be taxed at 12.5 percent?”
The government had removed the indexation benefit for companies holding unlisted shares with the reduction of the corporate tax to 22 percent in 2019, which was welcomed, the revenue secretary said.
This change was part of the broader corporate tax reform announced in September 2019, where the government reduced the base corporate tax rate to 22 percent for domestic companies that do not avail of any other exemptions or incentives. This simplified tax regime was aimed at promoting investment and economic growth by providing a lower tax rate but without certain benefits like indexation on capital gains.
Higher returns in real estate
The returns in real estate are actually in excess of 10-11 percent and vastly exceeds inflation which has been roughly at 4.6 percent over the last 10 years, Malhotra said.
The reduction in LTCG without indexation for real estate will benefit in almost all cases and the real estate companies have nothing to lose, he said.
“Nominal real estate returns are generally in the region of 12-16 percent. The indexation for inflation is in the region of 4-5 percent, depending on the period of holding. Therefore, substantial tax savings are expected to a vast majority of such taxpayers,” the finance ministry said on July 24.
For property held for five years, the new regime is beneficial when the property has appreciated 1.7 times or more. For property held for 10 years, it is beneficial when the value has increased to 2.4 times or more. For property purchased in 2009-10, if the value has increased to 4.9 times or more, it is beneficial. Only where returns are low (less than about 9-11 percent per annum) that the earlier tax rate is beneficial but such low returns in real estate are unrealistic and rare (less than 10 percent of the cases), it said in an explanation.
Revenue foregone
Even with the higher LTCG, the total revenue foregone with all the tax proposals will be Rs 7,000 crore annually, he said.
As a result of these proposals, revenue of about Rs 37,000 crore (Rs 29,000 crore in direct taxes and Rs 8,000 crore in indirect taxes) will be forgone while revenue of about Rs 30,000 crore will be mobilised additionally. Thus, the total revenue forgone is about Rs 7,000 crore annually, Finance Minister Nirmala Sitharaman had said in her Budget speech.
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