More Stories

Informist, Tuesday, Jul 23, 2024

 

--BUDGET: Short-term capital gains tax on some assets will be 20%
--All other financial, non-financial invest to attract tax slab rate
--LTCG on all financial, non-financial assets to be 12.5%
--Unlisted bonds, debentures to attract tax on capital gains
--To up LTCG exemption on some financial assets to 125,000 rupees/year
--Sitharaman: Lower capital gains tax to encourage investment

 

MUMBAI – The government today hiked the short-term and long-term capital gains tax on listed equity securities, taking the market by surprise. 

 

Presenting the full Budget for 2024-25 (Apr-Mar) in Parliament today, Finance Minister Nirmala Sitharaman said the short-term capital gains tax on equity shares, units of equity-oriented mutual fund and units of a business trust are proposed to be increased to 20% from 15%. Other short-term capital gains will continue to be taxed at the applicable rate.

 

The present short-term capital gains tax rate is too low and the benefit is largely flowing to high networth individuals, the memorandum explaining the provisions in the finance bill said.

 

Long-term gains on all financial and non-financial assets will attract a uniform 12.5%, the minister said. Long term capital gains tax was 10% earlier for securities transaction tax-paid listed shares, units of equity-oriented mutual fund schemes, and business trusts, and for other assets it was 20% with indexation benefits.

 

For listed bonds and debentures, the long-term capital gains are proposed to be reduced to 12.5% from 20% without indexation.

 

The government also said for all listed securities, the holding period considered as long term will be 12 months and for all other assets, it will be 24 months. The holding period for bonds, debentures and gold will be reduced from 36 months to 24 months. For unlisted shares and immovable property, it will remain at 24 months.

 

Sitharaman, however, increased the exemption limit for capital gains on equity shares and mutual funds to 125,000 rupees per year from 100,000 rupees.

 

The period of holding to qualify for long-term capital gains is also reduced to 24 months from 36 months for unlisted debentures and bonds. This is a positive move, according to Vinita Krishnan, executive director - direct tax, Khaitan & Co. But the tax proposal deems the gains on transfer or redemption of unlisted debentures and bonds as short term and proposes to tax them at a higher rate, and could hit the debt deal landscape, Krishnan said. It may also lead to tax arbitrage between listed and unlisted debentures, she added.

 

Market participants and analysts expect the capital gains tax hike to cause some market instability as investors react to higher taxes and this could lead to a change in how the market behaves in the coming months. According to Bharat Phatak, director, Scripbox, the capital gains transaction tax hikes came as a negative surprise.

 

Lakshmi Iyer, chief executive officer of investment and strategy, Kotak Alternate Asset Managers Ltd, said that capital gains tax hikes, along with that in the securities transaction tax on equity futures and options will likely be a spoiler for the market, albeit in the near term.

 

"The hikes in long-term and short-term capital gains tax are unexpected, and the market would adjust to that," Shrikant Chouhan, head-equity research, Kotak Securities said.

 

Market participants agree that the tax hikes are a negative but differ on the intensity. The increase in capital gains taxes, according to Taher Badshah, chief investment officer, Invesco Mutual Fund, "is modestly negative at the margin." The long-term capital gains tax hike also applies to investors in equity mutual fund schemes and this is a small dampener, according to Radhika Gupta, managing director and chief executive officer, Edelweiss Mutual Fund.

 

Investors who factored in the 10% long-term capital gains tax before investing in equities will likely be disappointed by the sudden increase. The long-term capital gain tax rate increase to 12.5% is applicable on transactions from today, which in a sense is retrospective and could have been avoided, Manish Jain, director of institutional business at Mirae Asset Capital said.  

 

The short-term and long-term capital gains tax hikes will potentially discourage investments by retail investors and offset the relief from tweaks in income-tax slabs for the middle class, according to Suman Bannerjee, chief investment officer, Hedonova.

In the case of real estate transactions, the long-term capital gains tax on sale of property was 20%. It now stands reduced to 12.5% but without the benefit of indexation. Addressing a post-Budget press conference, Sitharaman said the lower capital gains tax will encourage investments.

 

According to Nilesh Sharma, president and executive director, SAMCO Securities, the removal of indexation benefit for long-term capital gains will slow down the resale of residential flats and lands, and may increase the proportion of cash transactions in real estate deals. 

 

The indexation removal may lead to under-reporting of the sale value of old houses, particularly in major cities, said Gaurav Sharma, research analyst and founder of Smallcase Technologies.   End

 

Reported by Rajesh Gajra

Edited by Tanima Banerjee

 

 

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

 

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

 

Informist Media Tel +91 (22) 6985-4000

Send comments to feedback@informistmedia.com

 

© Informist Media Pvt. Ltd. 2024. All rights reserved.