Tweaking capital gains tax rules: What the government can do
However, sensing that the stock markets might react adversely, Finance Minister Arun Jaitley tried to allay the fears by saying that PM's speech has been wrongly interpreted and that no tax would be levied on long-term capital gains from equities.
- Jan 23, 2017,
- Updated Jan 23, 2017 8:26 PM IST
Will there be any change in the capital gains tax laws for listed equities this Budget? Ever since Prime Minister Narendra Modi said in one of his speeches in Mumbai recently that those who profit from financial markets must make a fair contribution to nation-building through taxes, speculations are rife that there might be long-term capital gains tax on equities.
However, sensing that the stock markets might react adversely, Finance Minister Arun Jaitley tried to allay the fears by saying that PM's speech has been wrongly interpreted and that no tax would be levied on long-term capital gains from equities.
However, despite the FM's assurance, there is a strong feeling that there might be some changes in the capital gains tax law for listed equities. In India, gains from listed equities are given some tax exemptions-short-term capital gains are taxed at a reduced rate of 15 per cent and long-term capital gains attract no tax. Besides, the holding period for listed equities to qualify for long-term capital gains tax exemption is also lower than that for other assets like real estate and gold. For availing long-term capital gains benefit, one has to hold these assets for a minimum of three years, while in case of listed equity its only a year.
Would the budget this year change anything? If at all, what options does the government have when it comes to tweaking the capital gains tax laws for listed equities?
Change in holding period for long-term capital gains: The government could look at the option of increasing the period of holding from 12 to 36 months for long-term capital gains. Already, gains from real estate and gold is considered long term if the holding period is minimum three years. In budget 2014, the government changed the holding period for long-term capital gains for debt mutual funds from 12 months to 36 months.
Levy tax on long-term capital gains from equities: The government can levy a long-term capital gains tax of 10% or less and remove securities transaction tax (STT) on equities. The rate of STT, which is a trade-off for exempting long-term capital gains tax on equities, varies from 0.01% to 0.25% depending on the kind of trade and securities. The STT is levied on the value of securities.
The government has been collecting around Rs 7,400 crore from securities transaction tax (STT) for the last couple of years. It has made a similar STT collection estimate for 2016/17. Have uniform capital gains tax rates irrespective of holding period: In most countries, there is no classification of capital gains based on holding period. The government can also remove that classification and uniformly tax both short- and long-term capital gains. Increase the short-term capital gains tax: This is the most unlikely scenario as most large equities transactions are short term in nature and any increase in short-term capital gains tax would lead to a sharp fall in the stock market.
Will there be any change in the capital gains tax laws for listed equities this Budget? Ever since Prime Minister Narendra Modi said in one of his speeches in Mumbai recently that those who profit from financial markets must make a fair contribution to nation-building through taxes, speculations are rife that there might be long-term capital gains tax on equities.
However, sensing that the stock markets might react adversely, Finance Minister Arun Jaitley tried to allay the fears by saying that PM's speech has been wrongly interpreted and that no tax would be levied on long-term capital gains from equities.
However, despite the FM's assurance, there is a strong feeling that there might be some changes in the capital gains tax law for listed equities. In India, gains from listed equities are given some tax exemptions-short-term capital gains are taxed at a reduced rate of 15 per cent and long-term capital gains attract no tax. Besides, the holding period for listed equities to qualify for long-term capital gains tax exemption is also lower than that for other assets like real estate and gold. For availing long-term capital gains benefit, one has to hold these assets for a minimum of three years, while in case of listed equity its only a year.
Would the budget this year change anything? If at all, what options does the government have when it comes to tweaking the capital gains tax laws for listed equities?
Change in holding period for long-term capital gains: The government could look at the option of increasing the period of holding from 12 to 36 months for long-term capital gains. Already, gains from real estate and gold is considered long term if the holding period is minimum three years. In budget 2014, the government changed the holding period for long-term capital gains for debt mutual funds from 12 months to 36 months.
Levy tax on long-term capital gains from equities: The government can levy a long-term capital gains tax of 10% or less and remove securities transaction tax (STT) on equities. The rate of STT, which is a trade-off for exempting long-term capital gains tax on equities, varies from 0.01% to 0.25% depending on the kind of trade and securities. The STT is levied on the value of securities.
The government has been collecting around Rs 7,400 crore from securities transaction tax (STT) for the last couple of years. It has made a similar STT collection estimate for 2016/17. Have uniform capital gains tax rates irrespective of holding period: In most countries, there is no classification of capital gains based on holding period. The government can also remove that classification and uniformly tax both short- and long-term capital gains. Increase the short-term capital gains tax: This is the most unlikely scenario as most large equities transactions are short term in nature and any increase in short-term capital gains tax would lead to a sharp fall in the stock market.