Union Budget 2024: Will Govt Standardize Long-Term Capital Gains Taxation?

In the second half of July, Union Finance Minister Nirmala Sitharaman is anticipated to announce the Union Budget for the fiscal year 2024-25. Investors are closely observing Budget 2024 for potential capital gains tax relief as rationalising and standardising the capital gains tax regime by simplifying holding periods and implementing uniform tax rates across all asset classes can be beneficial for investors in particular.

As the upcoming budget will probably hold steady on income tax rates for the majority of taxpayers, investors anticipate that the Union Budget would recommend a uniform 15% rate on all assets, with the exception of listed shares, and a uniform 24-month holding period for all other assets in order to rationalise long-term capital gains taxes, according to experts as the current rates for capital gains tax vary based on the duration of the holding term, from 10% to 305 and simplifying the structure itself could promote more investment and accountability.

CA (Dr.) Suresh Surana said, "The upcoming union budget 2024 may not tinker much with the capital gains structure as they would like to ensure the FIIs, DIIs and the retail investors of the stability of taxation regime in India. However certain measures in terms of rationalization of the period of holding for capital gains purposes may be taken up by the Union Budget. Under the current Income Tax Act provisions, capital gains are categorized as either long-term or short-term based on the holding period of the asset, which ranges from 12 to 36 months depending on the asset type. For instance, listed shares and equity-oriented mutual fund units have a 12-month threshold, while unlisted shares and immovable property require a 24-month holding period. Debt-oriented mutual funds have a 36-month holding period."

"To simplify the tax structure and reduce complexity for taxpayers, it is expected that the Union Budget may standardize the holding period for all non-listed equity assets from 36 months to 24 months. This reform aims to streamline and provide clarity on capital gains taxation across different asset classes," he further added.

Commenting on the same, CA (Dr.) Suresh Surana said "The Union Budget may propose to rationalize long-term capital gains taxation by setting a uniform rate of 15% for all assets, except listed shares, and establishing a consistent holding period of 24 months for other assets. Under current Income Tax Act provisions, capital gains are categorized as either long term or short term based on the holding period of the asset, which ranges from 12 to 36 months depending on the asset type. For instance, listed shares and equity-oriented mutual fund units have a 12-month threshold, while unlisted shares and immovable property require a 24-month holding period. Debt-oriented mutual funds have a 36-month holding period. Moreover, different tax rates apply to long-term capital gains (LTCG) depending on the asset type, creating complexity."

According to Chakravarthy V., Cofounder and Director, Prime Wealth Finserv Pvt Ltd, "Investors are keenly watching Budget 2024 for potential capital gains tax relief. Rationalizing and standardizing the capital gains tax regime by streamlining holding periods and establishing uniform tax rates across all asset classes would be advantageous for the investor community. Key proposals include aligning the long-term holding period for debt mutual funds with that of direct debt investments, reducing it from 36 months to 12 months, and reintroducing indexation benefits for long-term capital gains."

"Currently, capital gains tax rates range from 10% to 30% depending on the holding period. Simplifying the structure could encourage higher compliance and boost investment. Clear and equitable tax policies are essential for maintaining investor confidence and fostering market stability, especially as markets trade at record highs. The government's earnings from Securities Transaction Tax (STT) for FY 2023-24 were Rs 9,72,224 crore, while LTCG collections were a fraction of this, highlighting the potential impact of tax rationalization on overall revenue," Chakravarthy V further added.

For the relief of taxpayers, Chakravarthy V said the upcoming budget is likely to hold steady on income tax rates for most taxpayers. There's a chance of a slight increase in tax deduction limits, but overall changes seem minimal. Seniors struggling with rising living costs might see some relief, with a possible increase in tax exemption limits tailored for them. The budget is also expected to shed light on the future of old and new pension schemes, potentially impacting contributions to the National Pension Scheme (NPS).