Union Budget 2024: Will it tweak capital gains tax on stocks, real estate?

Capital gains tax in India is a crucial aspect of the Income Tax Act, 1961, levied on profits arising from the sale of capital assets such as land, buildings, vehicles, and securities. As the government gears up for Budget 2024, there is anticipation regarding potential tweaks in the capital gains tax structure, particularly concerning stocks and real estate. Simplification and standardisation of this tax regime could significantly impact investors and the broader economy.

What is capital gains tax?

Capital gains tax in India is governed by the Income Tax Act, 1961, and is levied on the profit or gain arising from the sale of a ‘capital asset’. Land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewellery are examples of capital assets.

There are two types of capital gains: Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG). As the names suggest, these levies are imposed based on the duration for which the asset was held.

The duration varies based on the type of asset:

• For listed securities, units of UTI, equity-oriented funds, and zero-coupon bonds, if they are held for not more than 12 months, the STCG is levied. Otherwise, LTCG is levied.

• Shares of unlisted companies and immovable property (land/building) held for not more than 24 months attract the STCG. Otherwise, the LTCG is applicable.

• For all other assets, the time period of holding for STGC is up to 36 months.

Apart from the time period, the current legal framework for capital gains tax has different tax rates and different parameters to compute the gains depending on the nature of capital asset.

Image courtesy: Moneycontrol

The need for change

Lokesh Shah, Partner at IndusLaw explains the problem arising out of this complexity. He said that based on the abovementioned factors, the rate of capital gains tax applicable on a transaction can range from 10 per cent to 40 per cent.

“Approximately 17 per cent of Indian households invest in stock markets […] For them, understanding the effect of each of these factors is crucial. However, given the complex nature of the framework, it becomes extremely difficult for a common shareholder to make rationalised decisions.”

Sumit Singhania, Partner at Deloitte India, said “Budget this year could be an opportunity for the government to make our capital gains tax structure a lot simplified and yet progressive.”

He mentioned the need to minimise tax arbitrage across financial asset classes. Tax arbitrage refers to exploiting differences in tax rates or treatment across different financial instruments, jurisdictions, or entities to minimise the overall tax liability.

“For instance, there is little merit in having a higher capital gains tax rate for residents on unlisted long-term equity (even with indexation benefit), whereas gains on listed shares are taxed at a lower rate of 10 per cent. The period for holding a financial asset to qualify for long-term classification should be uniformly provided for as 12 months,” Singhania added.

The indexation benefit allows taxpayers to adjust the purchase price of certain capital assets for inflation, thereby reducing their capital gains tax liability.

Will capital gains tax for stocks, real estate change

Moneycontrol cited experts as saying that rationalising and standardising the capital gains regime to streamline the holding period, uniformity in long-term/short-term rates across asset classes, and a change in the base year for indexation for long-term capital gains would benefit the investor community.

Regarding simplification, the real estate sector is reportedly likely to see a positive change in the capital gains tax structure.

India’s real estate sector is expecting positive changes to the capital gains tax regime. PTI

To bring uniformity to capital gains tax, the Centre is contemplating a revision in the holding period for immovable assets such as real estate, The Economic Times had reported recently. Currently, profits from real estate sales held for less than 24 months are treated as short-term capital gains, contrasting with the 12-month threshold for listed equities and equity mutual funds.

The proposed change would categorises property held for more than 12 months as a long-term asset, bringing it in line with equity investments. However, this adjustment is not expected to change the current tax rates for short-term and long-term capital gains.

“The proposal aims to standardise the holding period without immediate tax rate adjustments, possibly revisiting the capital gains tax regime in more detail after broader consultations,” the report quoted a source as saying.

JM Financial, in a recent report, also pointed out that, for the real estate sector, they anticipate that capital gains taxation for Real Estate Investment Trust (REIT) units will be brought par with equity shares.

However, in the same report, the brokerage house mentioned capital market participants are concerned on the likelihood of announcement of higher capital gains tax. The asset management sector was expecting long-term capital gains tax on stocks to be raised from 10 per cent. However, the noise around this has died down, and therefore, it may not happen.