Why does the capital gains tax regime need a relook?

What is the news?

The Revenue Secretary has said that the capital gains tax structure in India is complicated, and it is time for a relook.

What is Capital Gains Tax?

Capital Gains Tax is levied on the profits made on investments.It covers real estate, gold, stocks, mutual funds and various other financial and non-financial assets. 

It is divided into long-term capital gains tax(LTCG) and short-term capital gains tax (STCG) depending on how long you have held the investment in question. 

How is Capital Gains Tax different from Income Tax?

Unlike income tax, the percentage of Capital Gains Tax does not change on the basis of your overall tax slab.For example, the LTCG tax excluding surcharge on equity is the same for gains of ₹10 lakh or ₹10 crore. 

Moreover, there is also a separate set of deductions that apply to LTCG which do not apply to ordinary income.

Why is Capital Gains Tax so complicated?

Capital gains tax is complicated for a few primary reasons. 

First, the rate changes from asset to asset. LTCG tax on stocks and equity mutual funds is 10% but on debt mutual funds is 20% with indexation. 

Second, the holding period changes from asset to asset. The holding period for LTCG tax is two years in real estate, one year for stocks and three years for debt mutual funds and gold. 

Third, exemptions available against it come with their own complex conditions. For instance, buying a house after selling one can get you an exemption, but the new house must be bought in two years or built in three years of the sale.

What can the Govt do to fix these complications?

It can bring about uniformity in rates and holding periods for various assets. This will ensure that the tax for one asset is not more attractive than another. 

A uniform and long holding period to qualify for LTCG can also discourage short-term trading and speculative  behaviour  in  assets  such as  stocks. 

The  exemptions  for  LTCG such as reinvestment in another house property or capital gains bonds can also be made simpler with fewer conditions. 

Small investors can also be given relief by reducing rates of capital gains.

Is cryptocurrency taxed as capital gains?

The 2022 budget has proposed a 30% tax on cryptocurrency, which is higher than capital gains tax in many cases. 

Besides, under capital gains tax, investors can adjust profits and losses on different investments against each other or against profits/losses in the future. However, this cannot be done with cryptocurrency.

Source:  This post is based on the article “Why does the capital gains tax regime need a relook?” published in Livemint on 11th Feb 2022.