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Capital Gains Tax |
Why in News- The government decided to give taxpayers the option to pay 20 percent long-term capital gains (LTCG) tax with indexation benefit on the sale of assets acquired before July 23, 2024.
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UPSC Syllabus: Prelims: Current Events of National Importance and Economic Development Mains: GS-II, GS-III: Government Policies and Interventions, Indian Economy |
Capital Gains Tax
• Capital gains tax is a tax levied on the profit earned from the sale of a non-inventory asset.
• The most common capital gains are derived from the sale of stocks, bonds, precious metals, and property.
• Capital gains tax is classified into two categories based on the holding period of the asset: long-term and short-term capital gains tax.
Long-Term vs Short-Term Capital Gains Tax
Long-Term Capital Gains (LTCG):
• These are the profits arising from the sale of assets held for more than 36 months.
• These are usually taxed at a lower rate.
Short-Term Capital Gains (STCG):
• These are the profits arising from the sale of assets held for less than 36 months.
• These are taxed at the normal income tax rates applicable to the taxpayer.
As per current data, the tax rate for LTCG in India is 20% with indexation benefit, while STCG is taxed at the individual’s applicable income tax rates, which can go up to 30% depending on the income slab.
Indexation in Calculating Long-Term Capital Gains (LTCG) Tax
What is Indexation?
• Indexation is the process of adjusting the original purchase price of an asset or investment to account for inflation during the period it was held.
• This adjustment allows the taxpayer to neutralize the effect of inflation when calculating capital gains tax, potentially reducing tax liability.
Benefits of Indexation
• Indexation helps to ascertain the cost of acquisition while taking into account the effect of inflation, ensuring that tax paid on capital gains reflects real economic gain rather than inflation gain.
• This is particularly beneficial for assets held for long periods.
• Without indexation, nominal gains may appear higher, but they do not reflect the actual increase in the value of the asset after accounting for inflation.
• For example, if you bought a property for Rs 10 lakh in 2000 and sold it for Rs 50 lakh in 2020, the nominal gain would be Rs 40 lakh.
• However, with indexation, the purchase price can be adjusted to Rs 25 lakh, reducing the taxable gain to Rs 25 lakh.
• This adjustment ensures that you do not have to pay tax on the inflationary increase in the value of the property.
Highlights of the amendment
Introduction of two options
The government has introduced two options for taxpayers concerning LTCG tax on the sale of property acquired before July 23, 2024:
• 20 per cent LTCG tax with indexation benefit.
• 12.5 per cent LTCG tax without indexation.
Rollback of Budget proposal
• These amendments are a major step to roll back the LTCG-related announcements in the Budget, which initially removed the indexation benefit completely.
Specifications of the amendment
For assets acquired before July 23, 2024: Taxpayers can choose the lower tax amount from two options.
For assets acquired after July 23, 2024: The new regime of LTCG tax at 12.5 percent without indexation will apply.
Limited to real estate
• The amendments have restored indexation benefits only for real estate.
• Other unlisted assets like gold and shares will be taxed at different rates without the benefit of indexation.
Implications of the amendment
Grandfathering clause
• A provision in which the old rules continue to apply to certain existing situations while the new rules apply to all future cases.
• Those exempted from the new rules have grandfather rights.
• Properties bought before the budget presentation date (July 23) have been grandfathered, which means they retain the benefits of the old tax regime.
• This was a major point of contention in the original proposal, wherein properties bought after April 1, 2001, were not grandfathered
Possible market impact
• There are concerns that the new regime without indexation benefits may increase the frequency of real estate sales in the secondary market as owners would not want to hold properties for more than three to five years.
• Additionally, there are apprehensions that it may encourage the use of more cash in property transactions to avoid higher taxes.
Clarification from the government
• The government has clarified that rollover benefits have not been impacted.
• This means that if capital gains are reinvested in specified instruments or real estate, they will remain exempt from tax
Recent Tax Reforms
• The Indian government has introduced several major tax reforms in recent years, including the introduction of the Goods and Services Tax (GST), reduction in corporate tax rates, and simplification of personal tax regimes.
• These reforms are aimed at making the tax system more efficient, fair, and conducive to economic growth.
Tax Structure in India
• India’s tax structure is progressive, with different tax slabs depending on the income level.
• Burden The tax system of India is made up of various direct and indirect taxes levied by the central and state governments.
Its major components include:
Direct taxes: These are taxes that are paid directly to the government by individuals and organizations, which mainly include income tax and corporate tax.
Indirect taxes: These are taxes levied on goods and services and include goods and services tax (GST), customs duty and excise duty.
Income tax
• Income tax is progressive, which means that the tax rate also increases as the taxable amount increases.
The tax slabs for individual taxpayers are as follows:
Additional surcharges and cesses are applicable depending on the income level.
Surcharge
• Surcharge is an additional charge or tax levied on the existing tax.
• It is levied on the amount of income tax or corporate tax payable, thereby increasing the total tax liability.
• Surcharges are usually applicable on individuals and entities with higher incomes to ensure a progressive tax system.
• The primary purpose of levying a surcharge is to generate additional revenue from high-income people and corporations.
• This additional revenue is often used for welfare and development projects, which contribute to the country’s economic growth and stability.
Cess
• A cess is a type of tax. It is levied on the same tax base as a tax, which is levied by the government for a specific purpose.
• Unlike a surcharge, which is an additional charge on income tax, a cess is a direct tax that is levied to raise funds for a specific purpose, such as education or health.
• The money collected from the cess is used exclusively for the intended purpose.
• The money collected through cess is earmarked for specific purposes and is not part of the Consolidated Fund of India.
For example:
Health and Education Cess: This cess is used to fund primary and secondary education and health initiatives across the country.
Swachh Bharat Cess: Introduced to fund the Swachh Bharat (Clean India) campaign
• Targeted use of cess ensures that the money is used for the welfare and development of specific sectors, leading to overall national development.
Corporate Tax
• A type of direct tax levied on the income or capital of corporations and other similar legal entities.
• Corporate tax rates vary depending on the type of company and turnover.
As per current data:
Domestic companies: 22% (plus applicable surcharge and cess) without claiming any exemptions/incentives.
New manufacturing companies: 15% (plus applicable surcharge and cess) if incorporated on or after October 1, 2019, and starts production before March 31, 2023.
Goods and Services Tax (GST)
• GST is a unified indirect tax system that replaces multiple taxes such as VAT, service tax and excise duty.
• It has multiple rates: 0%, 5%, 12%, 18% and 28% based on the type of goods and services.
Major tax reforms introduced by the government in recent years
• GST, introduced on July 1, 2017, is a landmark reform that subsumed multiple indirect taxes into a single tax regime.
• It aims to create a unified market, simplify tax administration and enhance compliance.
Reduction in Corporate Tax Rate
In September 2019, the government announced a significant reduction in corporate tax rates to boost economic growth and investment.
The new rates are as follows:
• 22% for domestic companies not availing any incentives/exemptions
• 15% for new manufacturing companies.
Faceless Assessment and Appeals
• To enhance transparency and efficiency, the government introduced faceless assessments and appeals for income tax.
• This eliminates physical contact between taxpayers and tax officials, thereby reducing corruption and harassment.
Introduction of Section 115BAC
• From FY 2020-21, a new alternative tax regime was introduced under Section 115BAC for individuals and HUFs, offering lower tax rates without exemptions and deductions.
• It aims to simplify tax compliance.
Vivaad se Vishwas Scheme
• Launched in 2020, the scheme aims to resolve pending tax disputes by providing taxpayers an opportunity to settle cases with minimal penalties and interest.
• It helps reduce litigation and clear backlogs.
Aadhaar-PAN Linking
• To prevent tax evasion and streamline the process, the government made it mandatory to link Aadhaar with PAN.
• This ensures accurate identification and reduces duplicate or fraudulent entries.