The finance minister has proposed to do away with indexation benefits for long-term capital assets of all the categories like taxation of long-term capital gains on listed shares and equity mutual funds presently.
The capital gains sphere had become very complicated due to amendments made in isolation over the years in the law relating to the holding period and taxation of various asset classes. The finance minister has proposed some changes in the capital gains sphere to make the taxation of capital gains rational. After having discussed the real estate and equity products let us know to debate the amendment proposed in the taxation of debt and bullion products.
For a very long time, all mutual fund schemes were funds were classified into two categories Equity and non-equity schemes which included debt funds of all variations as well as bullion ETF/Saving Funds. The long-term capital gains in the first category were taxed at a flat rate of 10% over the initial one lakh which was taxed at zero rate. Short-term capital gains on such category were taxed at 15%. This has changed from this year and has been discussed in an earlier article.
In respect of the second category the cost was allowed to be indexed using the cost inflation index and the indexed long-term capital gains were taxed at 20% whereas the short-term capital gains were included in your income and taxed at your slab rate.
The qualifying period for making a second category of scheme as long term was thirty-six months till last year when the distinction based on holding period was done away with for the schemes where the equity component did not exceed 35% of the corpus. This created a third category of mutual fund schemes profit in respect of which are treated as short-term capital gains and taxed at the slab rate applicable to the taxpayer. These provisions applied to all the units of particular mutual fund schemes bought after 31st March 2023. The market-linked debentures were also proposed to be taxed the same way.
The creation of a third category created problems for investors in bullion ETF and saving funds. Profits on these schemes which speaking are debt schemes but profits thereon are now taxed as short-term capital gains at slab rates irrespective of holding period.
To rectify the drafting error a proper definition of debt fund is proposed to replace the earlier definition.
To remove the anomaly created by last year’s amendment instead of referring to the level of investment in domestic equity shares the Finance Minister has proposed a reference to the level of investments in debt for the third category of mutual fund scheme. She has proposed that all schemes with more than 65 % debt will fall in the third category where profits are treated as short-term and will be taxed at the slab rate. She has also proposed to tax profits on unlisted bonds and debentures as short-term capital gains irrespective of their holding period.
The second category of mutual fund schemes where neither the equity component nor the debt component exceeds 65%, will become long-term after 24 months instead of 36 months earlier and taxed at a flat rate of 12.50%. The short-term capital gains will continue to be taxed at your slab rates.
The finance minister has proposed to do away with indexation benefits for long-term capital assets of all the categories like taxation of long-term capital gains on listed shares and equity mutual funds presently. Moreover, she has proposed a uniform tax rate of 12.5% for long-term capital gains on the sale of all the categories of assets. Short-term capital gains of the second category of mutual funds will continue to be taxed at the slab rate applicable to you.
The Finance Minister has proposed that all the listed securities will become long-term assets after 12 months whereas the other assets will become long-term after 24 months.
With amendments proposed to remove the anomaly created by last year’s amendment the bullion ETF and saving funds will be treated like units of the second category of mutual fund schemes. Except that the ETFs will become long-term capital assets after 12 months but the bullion saving funds will become long-term capital assets after 24 months. Your investments in Sovereign Gold Bonds will become long-term capital assets after 12 months. The physical gold will also become a long-term capital asset after 24 months.
Balwant Jain is a tax and investment expert and can be reached at jainbalwant@gmail.com and on @jainbalwant on X formerly known as Twitter. (Views expressed are personal and do not necessarily reflect the official position or policies of the Outlook Media Group.)