The Treasury Department is considering rationalizing the long-term capital gains tax structure by bringing parity between comparable asset classes and revising the base year for calculating the indexation benefit to make it more relevant, an official said Friday.
Currently, stocks held for more than a year are subject to a 10 percent tax on long-term capital gains.
Gains from the sale of real estate and private equity held for more than 2 years and debt instruments and jewelry held for more than 3 years are subject to a 20 percent long-term capital gains tax.
The revenue department is now considering rationalizing tax rates as well as the holding period for calculating long-term capital gains and an announcement is likely in the 2023-24 budget to be presented in parliament on February 1.
Also, a change to the base year for calculating inflation-adjusted capital gains is being considered, the official added.
The index year for the calculation of capital gains tax is periodically revised to make it more relevant. The last revision was in 2017 when the base year was updated to 2001.
Since asset prices increase over time, indexation is used to arrive at the inflation-adjusted purchase price of assets to calculate long-term capital gains for tax purposes.
“The whole effort is to make the capital gains tax structure simple, taxpayer friendly and reduce the compliance burden. There is scope to bring equality in tax rates and retention periods across similar asset classes,” the official told PTI.
Under the Income Tax Act, profits from the sale of capital assets – both movable and immovable – are subject to ‘capital gains tax’.
However, the law excludes movable personal assets such as cars, clothing and furniture from this tax.
Depending on the period for which an asset is held, long-term or short-term capital gains tax is levied.
The law provides for separate tax rates for both categories of profits. The calculation method also differs for both categories.
AMRG & Associates Director (Corporate & International Tax) Om Rajpurohit said that there have been several changes to the capital gains structure after 2004 which has become too complicated to understand over time due to different rates and time frames for different asset classes and investment methods such as equity, debt, mutual funds (i.e. growth focused, daily dividend, debt/equity focused), land and buildings, foreign equities, etc.
“To bring simplicity, the asset class can be largely divided into two parts, namely movable assets and immovable assets, and at the same time define a single timeline for holding period to consider short-term or long-term profit/loss,” added Rajpurohit up to it.