Budget 2024: Prospects for Capital Gains Tax Relief for Investors

As the government begins work on the first full budget of its third term, investors are hopeful for some relief on capital gains taxes. Under the Income Tax Act, gains from the sale of capital assets, both movable and immovable, are subject to "capital gains tax."

Budget expectations

Capital gains tax rates range from 10% to the highest nominal tax rate of 30%, depending on the holding period, which can vary from one to three years.

Experts suggest that rationalizing and standardizing the capital gains regime by streamlining the holding period, ensuring uniformity in long-term and short-term rates across asset classes, and updating the base year for indexation of long-term capital gains would benefit the investor community.

There are hopes that the capital gains tax structure will be simplified by introducing a uniform holding period across domestic equities and mutual funds. Such uniformity in tax treatment is expected to encourage higher compliance.

Currently, direct investments in listed debt securities and zero-coupon bonds (whether listed or unlisted) are considered long-term investments if held for more than 12 months. In contrast, investments through a debt-oriented mutual fund scheme must be held for 36 months to qualify as long-term investments.

"Post April 2023, we have seen investors allocation tilting in favour of equities. We see merit in investors having debt: equity mix in their portfolio based on the advice of their investment counsellor. Hence we expect some tax concession for debt mutual funds. We expect status quo on capital gains tax for equities," said Deepak Agrawal, Chief Investment Officer-Debt, Kotak Mahindra AMC.

What experts say?

“Any kneejerk reactions owing to any new taxes being introduced remain low, for now,” said Siddharth Alok, Assistant Vice President (investments), Multi Ark Wealth-Epsilon Money Group.

Vivek Iyer, a partner at Grant Thornton Bharat, expects the budget to focus on creating access to new asset classes from a mutual funds perspective in real estate and infrastructure. “It would be good to see some announcements on the capital gains side but we expect it to be in the next budget rather than this year’s budget, given the need to stay the course on the fiscal consolidation path,” Iyer said.

In the lead-up to the recently concluded general elections, there were reports suggesting the government might consider uniform treatment for all asset classes. However, the finance ministry dismissed these reports as speculative.

Capital gains' structure

Currently, selling listed securities such as shares and units of equity-oriented mutual funds (where equity exposure exceeds 65% of the assets) within a year incurs a short-term capital gains (STCG) tax of 15%.

The long-term capital gains (LTCG) tax applies if listed securities are sold after a year, with a tax rate of 10% on gains exceeding ₹1 lakh in a year.

According to the amendments to the Finance Bill in March 2023, gains from debt fund investments with less than 35% of their assets in equities no longer qualify for LTCG and indexation benefits. Regardless of when these units are sold, the gains are added to your income and taxed at regular income tax rates.

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