Capital gains tax regime complicated, clean-up long overdue: Revenue Secretary Tarun Bajaj

Revenue Secretary Tarun Bajaj

The current capital gains tax regime is complicated due to the various rates and holding periods, and its simplification and clean-up are long overdue, Revenue Secretary Tarun Bajaj said on November 29. Bajaj was speaking about different capital gains taxes levied on assets like equity, debt and immovable property.

"Our capital gains tax regime is very complicated. It needs simplification. I have said this and I am repeating it again. We charge different taxes on different financials. We also have different time periods to decide, short-term and long-term. In some cases, we have indexation and in other cases, we don't have it. All this needs cleaning up," he told CNBC-TV18 in an interview.

Responding to a question about whether Budget 2023 would address the anomalies in capital gains taxation, and if it would bring parity in varied tax rates and holding periods, he said the policymakers have received several proposals to simplify the capital gains tax structure, and it is for the government to decide if they want to implement the changes in the Budget for 2023-24.

The top official did not disclose more details on it as discussions are confidential.

"We wanted to know about the views of the stakeholders and the people who would be affected by any change that may happen to the capital gains. I did not get the kind of response I was expecting throughout the year. We have done some preparations towards it. It is left now to the policymakers. I am not involved in the budget-making process. It is for them now whether to bring it or wait a little more to hold more discussions on it," Bajaj said.

Speaking on different tax rates for different assets, and the need for rationalising the tax rates as well as holding periods for calculating long-term capital gains, he said participants in the stock market, bond market, and real estate are important and policymakers need to consider how taxes would affect them.

"For somebody, nothing below three years should be counted as long term, and that long term should be three years and above. I didn't want to change anything on what my perception is, what my thinking is. People who operate in the stock market, bond market and real estate players are important. We should know what is affecting them. After all, it is tax. Tax will have an impact on the sale of the product. So, we would like to how it impacts each segment and then take a conscious call," Bajaj said.

Recently, a report said the finance ministry is looking at rationalising long-term capital gains tax structure by bringing parity between similar asset classes and revising the base year for computing indexation benefit to make it more relevant.

The index year for capital gains tax calculation is revised periodically to make it more relevant. The last revision took place in 2017 when the base year was updated to 2001. Since the prices of assets increase over time, the indexation is used to arrive at the inflation-adjusted purchasing price of assets to compute long-term capital gains for the purpose of taxation.

There have been demands for a more rational way of deciding the tenure for which the investments must be held on, to decide when they qualify for short-term and long-term capital gains taxation.

Capital gains tax, as per the Income Tax Act, is levied on the gains made through the sale of movable and immovable capital assets. Depending upon the period of holding an asset, the long-term or short-term capital gains tax is levied.

The capital gains tax rates differ even within the same asset class. For example, STCG (short-term capital gains) tax on stocks and equity mutual funds is 15 percent. For bond funds and bonds (listed and unlisted), investors pay, presently, taxes as per their income-tax slab rates; these can go up to 30 percent for many taxpayers.

Currently, long-term equity or equity-linked mutual funds, held for over a year, attract a 10 percent tax on gains that exceed Rs 1 lakh. Equity investments of up to one year fall under short-term and draw a tax of 15 percent.

Debt-oriented investments and immovable property, held for a minimum of three-year and two-year period, respectively, are considered as long-term and a tax of 20 percent is levied on the gains.

If you buy a listed bond, then you pay long-term capital gains (LTCG) tax of 10 percent, if you hold it for more than 12 months. But if you sell a debt mutual fund, the threshold for paying capital gains tax goes up to three years. Sell your debt fund after three years, and you pay LTCG tax of 20 percent (with indexation). STCG are taxed at your slab rate.

The Budget for 2023-24 fiscal would be presented in Parliament on February 1, 2023.