Globally, in most jurisdictions, there is no bifurcation of capital gains between long term and short term. Besides, unlike India, capital gains on asset classes in many countries are taxed equally, an analyst said.
Domestic equity investors are a bit disappointed with the change in long-term capital gains tax, which has been raised to 12.5 per cent from 10 per cent with immediate effect. This was in addition to the increase in short-term capital gains tax to 20 per cent from 15 per cent and sharp increase in STT on futures and options trades, raising fears equity investments would further be disincentivised going ahead.
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“Just finished wiping my tears after the massive hikes in capital gain taxes, both for long-term and short-term,” Market guru Shankar Sharma told BT TV in an exclusive interview.
Samir Arora of Helios Capital, without naming anyone, in a post on X, said one should learn from the cigarette makers, who have been able to convince the government that there is elasticity of demand — increasing taxes beyond a point will lead to fall in tax collections.
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“I guess stock market has become a bigger addiction, so fund managers and brokers say no problem to any tax of any kind,” he posted adding: “All fund managers and brokers I saw on TV said that the tax is not a problem, so who will protest.”
In 2004, STT replaced the long-term capital gains (LTCG) tax. But the Budget 2018 brought back LTCG at a rate of 10 per cent on annual gains of over Rs 1 lakh. STT was not removed. Now the government has revised the STT, STCG as well as LTCG. The exemption limit for capital gains though has been raised to Rs 1.25 lakh rates.
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Rationalisation
To be sure, the Finance Minister Nirmala Sitharaman did not tinker with the LTCG tenure, which stays at one year for equities. This is against two years for other asset classes. The fresh move is seen more of a bid to harmonise LTCG across asset classes, for example listed and unlisted equity, with real estate (now 12.5 per cent against 20 per cent but without indexation benefit), gold, gold/silver EFTs, debt mutual funds, bonds and REITs.
“Globally, in most jurisdictions, there is no bifurcation of capital gains between long term and short term. Besides, unlike India, capital gains on asset classes in most countries are taxed equally. I would say India’s long-term capital gains tax at 12.5 per cent still is quite competitive,” said Kranthi Bathini, Director of Equity Strategy at WealthMills Securities.
Global data
While countries such as Singapore, Mauritius and Oman do not impose such taxes, capital gains in the US are taxed based on overall taxable income. They are either nil, 15 per cent or 20 per cent. The headline highest statutory rate, thus, stands at 20 per cent.
In China, capital gains derived from share sale in the secondary market are exempted but a 20 per cent capital gains tax is levied on other assets, say real estate. In Brazil, gains are subject to progressive income tax rates, which range from 15 per cent for capital gains that does not exceed 5 million Brazilian Real to 22.5 per cent for the portion of the gain that exceeds 30 million Brazilian Real, as per data compiled with PwC.
In Japan, as per PwC, gains arising from sale of stocks are taxed at a total rate of 20.315 per cent (15.315 per cent for national tax purposes and 5 per cent local tax).
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In Australia, capital gains are subject to the normal personal income tax rate. There is a capital gains tax discount of 50 per cent for Australian resident individuals who own an asset for 12 months or more. It means if taxes are held for over 12 months, taxes are levied only on half of the capital gains.
“One must tip their hat to the government for killing two birds with one stone with the revision in LTCG. For serious long-term investors, the increase from 10 per cent to 12.5 per cent would hardly make a dent in the larger accounting of gains. At the same time, it will nudge investors into entering Indian markets with a reasonably long-term outlook and encourage them to step up as actual stakeholders in the Indian growth story,” said Shlok Srivastav, Cofounder & COO, Appreciate.
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Srivastav said while the LTCG hike would be a market sentiment dampener for some time, capital market players are going to take this move into stride and move on.
