Why is there a need to rethink the capital gains tax regime?

What is capital gains tax?

Capital gains tax is levied on gains made on investments. This includes real estate, gold, stocks, mutual funds and many 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. Unlike income tax, the percentage of tax does not change based on your overall tax slab. LTCG tax is same for whose benefit except surcharge on equity? 10 lakh or 100 million. There is also a separate set of deductions applicable to LTCG, which is not applicable to ordinary income.

Why is it so complicated?

The capital gains tax is complicated for a few primary reasons. First, the rate changes from asset to asset. LTCG tax on stock and equity mutual funds is 10% but on debt mutual funds with indexation it is 20%. 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, the exemptions available against it come with their own complex terms. For example, you may get a discount if someone buys a home after it has been sold, but the new home must be purchased within two years or built within three years of the sale.

Are Cryptocurrencies Taxed as Capital Gains?

The 2022 budget proposes a 30% tax on cryptocurrencies, which in many cases exceeds the capital gains tax. Also, under capital gains tax, investors can adjust gains and losses on various investments against each other or against future gains/losses. However, this cannot be done with cryptocurrency.

What distortions does it cause?

Since the capital gains tax is the same regardless of your overall income, it can increase the disparity. For example, a person whose salary 40 lakhs will pay 30% tax on it but only 10% LTCG tax on gains from stock trading. salary person 5 lakh will pay 5% tax on it but same 10% LTCG tax on stock trading. Second, a shorter period of one year for LTCG in stocks as compared to three years in debt mutual funds may encourage short-term trading in equities.

What can be done to correct these discrepancies?

The government can bring uniformity in rates and holding period for different properties. This will ensure that the tax for one property is not more attractive than the other. A similar and longer holding period to qualify for LTCG may also discourage short-term trading and speculative behavior in assets such as stocks. The exemptions for LTCG such as reinvestment in another house property or capital gains bond can also be simplified with lesser conditions. Small investors can also be given relief by reducing the rates of capital gains.