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Budget 2023: Will there be a rise in exemption limit for long-term capital gains tax?

The exemption allowed for long-term capital gains on equity investments need to be further enhanced to account for inflation, rising income levels and to encourage more investors into equity markets, say analysts

February 01, 2023 / 08:20 AM IST
Investors are usually a worried lot ahead of every Union Budget. This time is no different, with a close eye on news emerging around the Budget for 2023-24, with a hope that finance minister Nirmala Sitharaman deal investors a good hand. Here are some of the expectations
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Investors are usually a worried lot ahead of every Union Budget. This time is no different, with a close eye on news emerging around the Budget for 2023-24, with a hope that finance minister Nirmala Sitharaman deal investors a good hand. Here are some of the expectations
Rationalisation of holding period requirement Most investors find it hard to get a clear idea of threshold limits for deciding if an asset is classified as long-term or short-term to decide the tax liability. That’s because the holding period for terming if an investment is long-term varies from one asset class to another. Abhishek Soni, co-founder and CEO, Tax2win.in, wishes that the budget will simplify this. “At present, all capital assets have different holding periods and different tax rates, which can be simplified,” he said. While units of debt funds need to be held for a minimum of three years to be deemed as a long-term capital asset on which a concessional rate of tax can be availed on booked profits, units of equity funds need to be held for one year and real estate and unlisted stocks need to be held for two years. Balwant Jain, a Mumbai-based chartered accountant, said, “Bonds are a short-term asset class and equity is a long term asset class. The holding period requirement to term an investment as a long-term capital asset for the purpose of taxation should be such that the long-term investments in equities is encouraged.” He proposed that units of debt funds, if held for one year before sale, should be considered long-term capital asset. For units of equity mutual funds, it should be three years and for real estate it should be five years, he suggested.
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Rationalisation of holding period requirement
Most investors find it hard to get a clear idea of threshold limits for deciding if an asset is classified as long-term or short-term to decide the tax liability. That’s because the holding period for determining whether or not the investment is long-term varies from one asset class to another. Abhishek Soni, co-founder and CEO, Tax2win.in, wishes that the budget will simplify this. “At present, all capital assets have different holding periods and different tax rates, which can be simplified,” he said. While units of debt funds need to be held for a minimum of three years to be deemed long-term capital asset on which a concessional rate of tax can be availed on booked profits, units of equity funds need to be held for one year and real estate and unlisted stocks need to be held for two years. Balwant Jain, a Mumbai-based chartered accountant, said, “Bonds are a short-term asset class and equity is a long term asset class. The holding period requirement to term an investment as a long-term capital asset for the purpose of taxation should be such that the long-term investments in equities is encouraged.” He proposed that units of debt funds, if held for one year before sale, should be considered long-term capital asset. For units of equity mutual funds, it should be three years and for real estate it should be five years, he suggested.
Exemptions to long-term capital gains Under current rules, individual investors need not pay tax if the long-term capital gains on stocks and equity mutual funds do not exceed Rs 1 lakh in a financial year. Beyond this threshold, they are taxed at 10 percent. Mihir Tanna, associate director (direct tax), S K Patodia & Associates, a Mumbai-based firm of chartered accountants, argued that the exemption limit is inadequate. “The limit should go up to Rs 2.5 lakh or higher. Income of individuals is not subject to income tax as long as it is below Rs 2.5 lakh in a financial year,” he pointed out. The exemption allowed for long-term capital gains on equity investments need to be further enhanced to account for inflation, rising income levels and to encourage more investors into equity markets, say analysts. “Many times, investors are seen dabbling in stocks and units of equity mutual funds under the pretext of booking profit just because they are held for one year and 10 percent rate is applicable on long-term capital gains beyond the exemption limit of Rs 1 lakh
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Exemptions to long-term capital gains
Under current rules, individual investors need not pay tax if the long-term capital gains on stocks and equity mutual funds do not exceed Rs 1 lakh in a financial year. Beyond this threshold, they are taxed at 10 percent. Mihir Tanna, associate director (direct tax), S K Patodia & Associates, a Mumbai-based firm of chartered accountants, argued that the exemption limit is inadequate. “The limit should go up to Rs 2.5 lakh or higher. Income of individuals is not subject to income tax as long as it is below Rs 2.5 lakh in a financial year,” he pointed out. The exemption allowed for long-term capital gains on equity investments need to be further enhanced to account for inflation, rising income levels and to encourage more investors into equity markets, say analysts. “Many times, investors are seen dabbling in stocks and units of equity mutual funds under the pretext of booking profit just because they are held for one year and 10 percent rate is applicable on long-term capital gains beyond the exemption limit of Rs 1 lakh.
Encourage real long-term investing There is a need to encourage real long-term investing with suitable tax soaps,” said Nitesh Buddhadev, a chartered accountant and founder of Nimit Consultancy. There should be no tax on capital gains if the investments in listed stocks, unlisted stocks or equity mutual funds are held for minimum ten years, he added. Jain, however, has a different suggestion for incentivising long-term investments in equities. “Currently. Long-term capital gains on equities beyond Rs 1 lakh in a financial year are taxed at a flat rate of 10 percent, irrespective of how long you held it. There is a need to allow indexation benefit while computing long-term capital gains on investments in equities and units of equity mutual funds,” he said
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Encourage real long-term investing
There is a need to encourage real long-term investing with suitable tax soaps,” said Nitesh Buddhadev, a chartered accountant and founder of Nimit Consultancy. There should be no tax on capital gains if the investments in listed stocks, unlisted stocks or equity mutual funds are held for minimum ten years, he added. Jain, however, has a different suggestion for incentivising long-term investments in equities. “Currently, long-term capital gains on equities beyond Rs 1 lakh in a financial year are taxed at a flat rate of 10 percent, irrespective of how long you held it. There is a need to allow indexation benefit while computing long-term capital gains on investments in equities and units of equity mutual funds,” he said
Introduce capital gains exemption to fixed income products too Indexation benefit to equity investments also needs to be seen in the context of the higher level of risk an equity investor takes compared to those taken by fixed income investor. Soni said, “The capital gains exemption of Rs. 1 lakh is only available in the case of long-term gains from equity shares and equity-oriented mutual funds, which is expected to be given for long-term gain from debt-oriented mutual funds also.” There may be some investors who are not investing in equities at all. Such investors end up paying taxes on profits booked on their long-term investments in debt funds and cannot avail any exemption
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Introduce capital gains exemption to fixed income products too
Indexation benefit to equity investments also needs to be seen in the context of the higher level of risk an equity investor takes compared to those taken by fixed income investor. Soni said, “The capital gains exemption of Rs 1 lakh is only available in the case of long-term gains from equity shares and equity-oriented mutual funds, which is expected to be given for long-term gain from debt-oriented mutual funds also.” There may be some investors who are not investing in equities at all. Such investors end up paying taxes on profits booked on their long-term investments in debt funds and cannot avail any exemption.
Rate revisions are due Short-term capital gains on equities are taxed at 15 percent. This was well accepted when the minimum rate of income tax was 10 percent. “Now that the minimum rate of tax is cut to 5 percent, investors in that income tax slab find this 15 percent rate punitive. There should be some respite offered to small investors,” said Jain. Investors expect the finance minister to offer some relief on the tax rates payable on capital gains booked on debt investments. Long-term capital gains on debt funds are currently taxed at 20 percent and short-term capital gains as per the slab rate of the investor. However, interest rates have come down in the pandemic period and inflation has surged. Even if interest rates have inched up in the last one year, there is talk that rates will trend down in the medium to long term. Expectations of low interest rates and current high rate of taxes leave very little in the hands of the investors, on a post-tax basis. Clearly, there is a long list of prayers from various sections of the economy ahead of the budget. It will be interesting to see how many are answered.
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Rate revisions are due
Short-term capital gains on equities are taxed at 15 percent. This was well accepted when the minimum rate of income tax was 10 percent. “Now that the minimum rate of tax is cut to 5 percent, investors in that income tax slab find this 15 percent rate punitive. There should be some respite offered to small investors,” said Jain. Investors expect the finance minister to offer some relief on the tax rates payable on capital gains booked on debt investments. Long-term capital gains on debt funds are currently taxed at 20 percent and short-term capital gains as per the slab rate of the investor. However, interest rates have come down in the pandemic period and inflation has surged. Even if interest rates have inched up in the last one year, there is talk that rates will trend down in the medium to long term. Expectations of low interest rates and current high rate of taxes leave very little in the hands of the investors, on a post-tax basis. Clearly, there is a long list of prayers from various sections of the economy ahead of the budget. It will be interesting to see how many are answered.