Budget 2024: Suggestions On Taxation Of Capital Gains

Availability of Rebate under Section 87 A for capital gains

Section 87 A allows a resident Individual tax rebate of up to Rs. 12,500/- if his total taxable income does not exceed Rs. 5 lakhs for the year under the old tax regime. If you opt for the new tax regime, you get a higher threshold of 7 lakh of income and you can avail of a rebate of up to Rs. 25,000/- against your tax liability.

This rebate is available against your tax liability of any nature except tax liability on long-term capital gains listed equity shares or equity-oriented schemes, on which security transaction tax (STT) has been paid.  Even you can claim this rebate against your tax liability for short-term capital gains on the same equity products.  

I am unable to understand the strange reasons for such discrimination. In my opinion, it is illogical to allow rebates against short-term capital gains and not do so against long-term capital gains of the same asset class.  Does the government want small taxpayers to invest in equity products for short duration which prudently is not advised?

It is interesting to note that this rebate is available even on long-term capital gains on the sale of all other assets including land and buildings.  Logically and contrarily it should be allowed on listed shares and equity units which are otherwise given preferential treatment as regards the rate of tax payable on capital gains and holding period requirement for making them long-term against other asset classes. I feel the rebate under Section 87A should be made available against long-term capital gains on these equity products.

Flat rate of tax on short-term capital gains

Short-term capital gains of any nature, referred to as other short-term capital gains, except arising on listed equity shares and equity-oriented mutual fund schemes, are taxed at the slab rate applicable to you. In cases where the applicable slab tax rate is lower than 15% other short-term capital gains included in such income are taxed at a lower rate but short-term capital gains on listed equity shares and equity schemes are taxed at a flat rate of 15%. The 15% tax on short-term capital gains is supposed to be a concessional rate of tax but for taxpayers with a lower than 15% slab rate, it becomes punitive. This is an anomaly which needs to be removed by providing that short-term capital gains on listed equity shares and equity schemes shall not be taxed at a rate higher than the marginal slab rate applicable to the taxpayer.

Also read; Budget 2024: Life Insurers Advocate For Tax Deductions On Annuities And A Reduction in GST

Rationalisation of holding period of various capital assets

Before 1-4-1987, a uniform period of 36 months was prescribed to treat capital assets as long-term. Any asset sold before that holding period was treated as a short-term asset and taxed accordingly. Later on, the holding period requirement of 36 months was reduced to 12 months for listed equity shares and all the units of mutual funds. However, the holding period was again restored to 36 months for mutual fund units other than equity schemes like debt funds/gold funds etc. Again last year the profits from mutual fund schemes with less than 35% of equity holding have been made taxable as short-term capital gains irrespective of holding period for the units purchased after 31st March 2023.

As of today, investments in listed securities and equity schemes become long-term after twelve months but land and building become long-term after you have held them for 24 months. For an asset like land and building which is normally bought to hold for a longer period but certainly not 24 months, the requirement of 24 months prescribed also seems illogical to me.  Against this requirement of 24 months for land and building the holding period requirement for relatively liquid assets like physical bullion like gold and silver is 36 months which on the face of it looks irrational.

In my opinion, the lower holding period requirement of 24 months for non-financial assets like land and buildings gives impetus to speculation in these assets instead of channelling genuine and long-term investment in the real estate sector. The capital gains provisions on taxation of mutual fund schemes like debt funds, gold and silver ETF and saving funds introduced last year, where the equity component does not exceed 35% also need to be relooked.

The holding period requirement for all non-financial assets should be raised to if not 60 months then at least to 36 months to make the holding period requirement rational and reasonable based on the nature of the capital asset.

Irrational differentiation for investment in different forms of bullion

After changes made last year in the taxation of mutual fund schemes with not less than 35% of equity exposure commodity mutual fund schemes like gold and silver ETF as well as gold and silver saving funds are taxed at the slab rate irrespective of the holding period. This is in contradistinction to the tax treatment of physical gold where the investment becomes a long-term capital asset once the holding period completes 36 months on which you are entitled to avail the benefit of indexation as well as a concessional flat rate of 20% irrespective of your actual slab rate. This differential scheme of taxation of electronic bullion vis a vis physical bullion looks ridiculous in my opinion. This anomaly needs to be corrected immediately to promote investment in electronic gold rather than in physical gold.

I hope the finance minister is listening. 

(The writer is a tax and investment expert and can be reached at jainbalwant@gmail.com and @jainbalwant on his Twitter handle. Views expressed are author’s personal and do not necessarily reflect the official position or policy of the Outlook Media group or its employees.)