Every year, when the Union Budget draws near, the stock market turns a bit cautious over prospects of changes in long term capital gains tax or announcement of uniformity of holding period among a few asset classes. This year is no different. To add, the finance minister Nirmala Sitharaman at a recent BSE event cited risks pertaining to unchecked retail participation in the futures & options (F&O) market, with a few media report suggesting F&O income could be tagged as 'speculative' against 'business income' at present.
Suresh Surana, a practicing Chartered Accountant, said the Modi government may not tinker much with the capital gains tax rate, except for some measures that may rationalise the tax rates. "The reason could be to ensure investors of the stability of the tax regime and confidence building amongst retail investors, DIIs and FIIs," he said.
Surana said there are multiple capital gains tax rates in India at present and the applicability of same depends on the nature of the capital asset transferred. For instance, long term capital asset being listed shares or units of equity-oriented mutual fund transferred through recognised stock exchange is taxed u/s 112A at the rate of 10 per cent on the gains, exceeding Rs 1,00,000. For short term capital gains, it is taxed at 15 per cent u/s 111A of the IT Act.
Further, other specified assets such as unlisted shares and immovable property are taxed u/s 112 at the rate 20 per cent in case of long-term capital gains or at applicable rates in the case of short term capital gains.
"Since the prevailing capital gain tax structure is highly complex, the government may consider simplifying the same by capping the tax on capital gains to a standard rate," he said.
At present, the short-term capital gains is levied at 15 per cent and long-term gains at 10 per cent with the holding period defined as one year. "Increasing the tax rate and/or extending the time period are potential negatives for the equity market," Nomura India said earlier this month.
Jefferies had in May argued that an extension of the period would be better than raising the LTCG rates. Another proposal being floated would be to increase capital gains tax for retail investors but not for those investing in mutual funds, Jefferies noted.
If F&O income is treated as speculative, profits might only be offset against F&O losses and not any other business losses. There might be other changes expected, which include taxability of F&O transactions similar to that of cryptocurrencies i.e. 30 per cent (plus applicable surcharge and cess), Surana said.
Rajarshi Dasgupta, Executive Director at AQUILAW. said if F&O transaction is treated as speculative income in the forthcoming Budget, it would attract a straight 30 per cent income tax (plus 4 per cent cess) instead of applicable slabs of 5 per per cent, 20 per cent or 30 per cent on different slabs of income.
Besides, Surana said transferred capital asset is taxed as short-term capital asset u/s 2(42A) of IT Act if the period of holding of such asset does not exceed a specified time period immediately preceding the date of transfer, otherwise shall be taxed as long-term capital asset u/s 2(29AA) of IT Act. "Such specified time period shall depend on the nature of the capital asset transferred and therefore it ranges from 12 months to 36 months. The government may consider adopting a uniform approach for the period of holding of certain assets to be reduced from 36 months to a maximum of 24 months," he said.