The government is reportedly planning to introduce a new income tax bill in the Budget session of Parliament, aiming to simplify the six-decade-old Income Tax Act, 1961. The proposed law, according to a PTI report, is likely to cut the number of provisions and reduce the Act’s volume by 60%, seeks to make taxation clear and comprehensible for taxpayers while minimizing disputes and litigation.
However, concerns are mounting over one critical aspect: the potential equalization of capital gains tax with active income tax rates.
Chartered Accountant Paaras Gangwal cautioned on X, “Direct Tax Code is coming in Budget? Simplification should be there for sure, but the government should not consider capital gain at par with active income. Else, this will be disastrous.”
Capital gains arise from asset value appreciation over time, while active income is earned through regular work or business activities. The current system gives capital gains preferential tax treatment, with long-term gains taxed at 10-20%, far lower than the regular income tax rates for active income.
Experts argue that treating capital gains like active income could discourage long-term investment.
They note that such a move could lead to higher tax burdens for investors, reduced capital formation, and even market volatility, adding that the current preferential treatment helps offset inflation impacts on asset values.
The Income Tax Department has received over 6,500 suggestions from stakeholders for simplifying the Act. The overhaul, led by a committee under the Central Board of Direct Taxes (CBDT), aims to eliminate obsolete provisions and reduce compliance burdens. The updated law could include fewer chapters and sections, trimming down the Act’s existing 298 sections and 23 chapters significantly.
While the government’s intention is to make tax laws concise and predictable, experts warn that poorly calibrated reforms, such as reclassifying capital gains, could disrupt investor behavior and strain middle-class taxpayers.