Issues with India’s capital gains tax regime

Source: The post issues with India’s capital gains tax regime has been created, based on the article “Time to overhaul India’s capital gains tax regime” published in “Live mints” on 27th June 2024

UPSC Syllabus Topic: GS Paper 3 – Indian Economy – mobilization of resources.

Context: The article discusses the need to simplify India’s capital gains tax. It highlights the inconsistencies in tax rates across different asset classes and calls for a uniform, fair, and straightforward system to make investment planning easier and stimulate more investments.

For detailed information on concerns related to India’s income tax system read this article here

What are the issues with India’s capital gains tax regime?

1. Complexity and Inconsistency: India’s capital gains tax rates differ by asset classes. This variation makes investment planning difficult.
2. Short-term vs. Long-term Gains on Listed Shares: Gains on listed shares or equity mutual funds held for less than 12 months are taxed at 15%, while long-term gains (over 12 months) are taxed at 10% if annual gains exceed ₹1 lakh.
3. Debt Mutual Funds: These are taxed at the marginal rate of income tax, regardless of the holding period.
4. Real Estate: Gains on property sold within two years are taxed at the marginal rate; after two years, they are taxed at 20% (with inflation adjustment). Reinvesting the proceeds in another property can avoid this tax.
5. Gold Investments: Physical gold gains are considered long-term only after three years, with different tax treatments for ETFs and sovereign gold bonds.

What should be done?

1. Simplify the Regime: Simplifying India’s capital gains tax regime can make investment planning easier.
2. Uniform Cut-off Period: Use a common cut-off period of one year for all short-term holdings. This ensures consistency and fairness.
3. Standard Rates: Apply the same tax rates for short-term and long-term gains across all asset classes. This removes confusion and aligns investment incentives.
4. Inflation Adjustment: Provide inflation adjustments for gains on holdings longer than five years to account for value changes over time.
5. Consistency Across Assets: Ensure similar tax treatment for comparable assets. For example, treating gold ETFs the same as physical gold to avoid distortions in investment choices.

Question for practice:

Discuss the challenges with India’s current capital gains tax regime and propose potential solutions for reform.