Union Finance Minister Nirmala Sitharaman will present the full-year Budget 2023 today. Citizens are awaiting the Budget announcements related to income tax slabs as personal income tax slabs and rates have remained unchanged since 2017-18. Another anticipated one is the restructuring of capital gains structure.
Experts say that current capital gains tax regime is highly complicated and needs simplification. According to sources, it is likely the government would rationalise the long-term capital gains tax structure by bringing parity between similar asset classes and revise the base year for computing the indexation benefit to make it more beneficial.
Given that, let's look at the current structure of capital gains
What is capital gains tax?
Any profit or gain that arises from the sale of a ‘capital asset’ comes under the category ‘income from capital gains’, and hence individuals will need to pay tax for that amount in the year in which the transfer of the capital asset takes place. This is called capital gains tax.
The two types of Capital Gains are short-term capital gains tax (STCG) and long-term capital gains tax (LTCG).
STCG are the profits that individuals earn when they sell off the capital assets before one year of holding those. Long term capital gains (LTCG) are the profits that individuals earn when they sell off their capital assets post one year. It is applicable at 20 percent except on the sale of equity shares and the units of equity-oriented funds. It is 10 percent and above on the sales of Equity shares and unit of equity-oriented funds.
How are equity investments, mutual funds taxed?
When an investor parks money in shares, they make
capital gains on the sale of shares which are taxable. Here, the long term is defined as more than 1 year for listed stocks and equity-oriented mutual funds (EOMF), whereas for unlisted shares it is 24 months.
In the case of listed equity shares or mutual funds which are held for more than one year, the gains are long-term in nature and get taxed at a tax rate of 10 percent. However, there is no tax for aggregate long-term gains up to Rs 1 lakh in a financial year.
The short-term gains for listed equity investments bought and sold within a year, meanwhile, get taxed at a rate of 15 percent. The benefit of indexation of cost price is not available for both short-term and long-term gains in case of listed equity investments.
In case of unlisted shares, if the period of holding is up to 24 months, the short term capital gain is taxed at slab rates for residents. If the period of holding exceeds 24 months, then long term capital gain is taxed at 20 percent.
For non-resident, it is taxable at 10 percent (without indexation and without foreign exchange fluctuation benefit). The short-term gains on unlisted equity shares get taxed as per the income slab rates of the taxpayer. For residents, dividend is taxable at applicable rate whereas for non-resident, it is taxable at 20 percent.
Equity oriented mutual funds are taxed in the same way as listed equity shares.
