India Mulls Changes to its Capital Gains Tax Regime

November 11, 2022 Posted by India Briefing Written by Naina Bhardwaj Reading Time: 2 minutes

India is mulling the possibility of amending its capital gains tax regime to make it simpler and more streamlined. The probable changes will mostly draw influence from a direct tax task force report of 2019, and are likely be announced in the upcoming Union Budget 2023.

According to a recent report in The Economic Times (ET), India’s federal government may soon introduce changes to simplify the capital tax regime, including the rationalization of the multiple holding periods. The primary consideration behind making such amendments will be parity within the assets.

The ET report quoted the officials as saying that “the capital gains tax regime is slightly complex. There is a case for simplifying and rationalizing it.”

What are the proposed changes to the capital tax regime?

The proposed changes to the capital gains tax regime draw influence from a direct tax task force report of 2019, which had recommended changes in indexation benefit rules in 2019. The task force, led by Central Board of Direct Taxes (CBDT) member Akhilesh Ranjan, sought to replace the existing Income Tax Act with the new Direct Tax Code.

The task force had suggested three categories of assets – equity, non-equity financial assets, and all others including property – and proposed indexation benefits for all categories except equities.

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Additionally, the panel also suggested long-term capital gains tax of 10 percent for gains on the sale of equity assets held for more than 12 months. For equities held for a shorter period, a 15 percent short-term capital gains tax was proposed.

For non-equity financial assets held for over 24 months, the panel proposed a long-term capital gains tax of 20 percent with indexation, for gains on sale. In the case of all other assets, a 20 percent tax with indexation on gains on sale post holding a period of 36 months was proposed.

Currently, long-term capital gains are taxed at 20 percent. In case of equities, it is 10 percent if the total gain in a financial year exceeds INR 100,000. The short-term capital gains tax rate for equities and related assets is 15 percent.

What are the current rules?

Equities and preference shares listed on stock exchanges, equity-based mutual funds, zero coupon bonds, and Unit Trust of India units are considered long-term assets if held for a period of over 12 months.
Immovable properties, such as land, building, and house property held for over 24 months are categorized as long-term assets.
Debt-oriented mutual funds or jewelry are considered long-term assets if held for over 36 months.
The indexation benefit, or adjustment for inflation, is available for debt funds and real estate.

For detailed insight into Capital Gains Tax Regime in India, refer to the explainer by Dezan Shira and Associates.

What is the industry opinion on the proposed changes?

Tax experts, too, have reiterated the need to reduce the holding period (for classifying into a long-term capital asset) of financial products like bonds, debts funds, gold exchange traded fund (ETF) to 24 months from 36 months.

Additionally, they have also called for an increase in the holding period for land and building to 36 months or even 48 months to discourage speculative transactions on an otherwise illiquid asset.

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