There are many shortcomings in the rules of Capital Gains Tax. For a long time there has been a demand to address these shortcomings. The question is whether Finance Minister Nirmala Sitharaman will make changes in the budget related to capital gains tax. The Finance Minister will present the Union Budget on February 1. This can be the right opportunity to address the loopholes related to the capital gains tax rule. Let us know in detail about the current rules of capital gains tax and their drawbacks.
At present, the capital gains tax rules are different for different assets. In some cases, there are different rules for different products of the same asset class. This confuses investors a lot. It is not possible for them to remember these different rules. Because of this many times they are forced to pay more tax than expected. If these rules are rationalised, it will be a lot easier for investors.
If you hold the listed bond for more than 12 months, you have to pay long term capital gains. Its rate is 10 percent. But, the rule is different in the case of Debt Mutual Funds. If you hold debt mutual funds for more than three years, you have to pay Long Term Capital Gains (LTCG) tax. Its rate is 20% (with indexation). If you sell debt mutual funds before three years, you have to pay Short Term Capital Gains Tax (STCG). Its tax race will be according to your income tax slab.
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Tax experts say that rationalizing the holding period is essential for long-term capital gains (LTCG) on an asset. There should not be much difference between the tax period for short-term capital gains and long-term capital gains for assets. The problem is not only of duration. Tax rates are different in the same asset class. For example, the STCG rate on stock and equity mutual funds is 15 per cent. In case of bonds and bond funds, the rate for STCG tax depends on the income tax slab of the taxpayer. It goes up to 30 per cent for people with higher incomes.
Rajesh Gandhi, partner, Deloitte, says, “There is a need to encourage direct investment in bonds and government securities. Retail investors especially should be encouraged to invest in these. Many investors buy listed bonds for a longer duration. But, at times, When they sell them within a year, they have to pay short term capital gains tax on them as per their tax slab. Like equity, this needs to be reduced to 15 per cent.”
Investments in unlisted bonds and debt mutual funds should also be treated as long term if held for more than 12 months. In case of equity, it is more than 12 months. Association of Mutual Funds in India (AMFI) has decided to invest more than 12 months in non-equity oriented mutual funds that invest 65 per cent or more of their assets in listed debt securities. treated as long term capital gain.
There is also a need to change the capital gains tax rules related to investment in real estate. Balwant Jain, a Mumbai-based chartered accountant, says that if real estate is sold after 60 months, it should be treated as long-term capital gains. This is because investing in real estate is done from a long-term perspective. If the investment in debt is held for more than 12 months, it should be considered as long term.
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