<p>When Finance Minister Nirmala Sitharaman presents the Union budget later this month, investors will be hoping that she may tinker with the structure of the capital gains tax, which is not uniform presently. Its burden depends on the type of asset & the period of holding, causing confusion among investors. The government is seized of the matter and has been contemplating changes in the tax structure to have a level playing field among asset classes. Government sources say that it is “likely to overhaul the entire capital gains tax structure in the union budget”. So let’s get a better understanding of the issue and structure as it is now.</p>.<p><strong>Equity shares & equity mutual funds</strong></p>.<p>Short term capital gains (STCG) will arise if your holding period i.e the difference between the date of purchase & the date of sale is less than 12 months. The tax on the gains will be 15 per cent. Equity mutual funds are those investing a minimum of 65 per cent in equities. Long term capital gains (LTCG) will arise if your holding period is more than 12 months and the tax will be 10 per cent on any amount exceeding Rs 1 lakh. Incidentally speculative income which is earned through intra-day trading is treated as business income & is taxed per your tax slab. It will not be tax efficient for investors in the highest tax bracket.</p>.<p><strong>Debt mutual funds</strong></p>.<p> If you have invested in Debt funds which invest more than 65 per cent in debt securities the gains are added to your income and you are taxed as per the marginal tax rate. Mind you, no distinction is made between short term and long-term capital gain in debt funds. However, for debt funds having exposure to debt less than 65 per cent but more than 35 per cent, STCG will arise if your holding period is less than 36 months & taxed as per tax slabs. LTCG will arise if your holding period is more than 36 months & taxed at 20 per cent with indexation. Indexation is the process of revising the purchase price of an asset upwards to reflect the impact of inflation. This is done using the cost inflation index which is published by the Central Board of Direct Taxes (CBDT) for every financial year.</p>.<p><strong>Real estate</strong></p>.<p>The holding period for STCG is 24 months & the gains will be added to your income. LTCG will arise if your holding period is more than 24 months and the tax is 20 per cent with indexation benefit. However, you can avoid paying LTCG tax by investing in capital gain bonds or using the capital gains for purchase or construction of residential property under Section 54 of Income tax Act.</p>.<p><strong>Gold</strong></p>.<p>The holding period for STCG is less than 36 months and the gains are added to your income. LTCG will arise if your holding period is more than 36 months & tax is 20 per cent with indexation benefit. The best way to avoid paying LTCG tax is investing in Sovereign Gold Bonds and holding them till the maturity period of 8 years.</p>.<p>As we can see, the holding period for asset classes varies from 12 months to 24 months to 36 months and so is the tax. Investors expect the rationalisation and standardisation of holding periods & tax rates across asset classes. Let us hope that the FM proposes a common holding period and tax rates for debt mutual funds, gold and real estate, while keeping the status quo in equity. After all an investor takes risks in equity and s/he should be rewarded for taking risks!</p>
<p>When Finance Minister Nirmala Sitharaman presents the Union budget later this month, investors will be hoping that she may tinker with the structure of the capital gains tax, which is not uniform presently. Its burden depends on the type of asset & the period of holding, causing confusion among investors. The government is seized of the matter and has been contemplating changes in the tax structure to have a level playing field among asset classes. Government sources say that it is “likely to overhaul the entire capital gains tax structure in the union budget”. So let’s get a better understanding of the issue and structure as it is now.</p>.<p><strong>Equity shares & equity mutual funds</strong></p>.<p>Short term capital gains (STCG) will arise if your holding period i.e the difference between the date of purchase & the date of sale is less than 12 months. The tax on the gains will be 15 per cent. Equity mutual funds are those investing a minimum of 65 per cent in equities. Long term capital gains (LTCG) will arise if your holding period is more than 12 months and the tax will be 10 per cent on any amount exceeding Rs 1 lakh. Incidentally speculative income which is earned through intra-day trading is treated as business income & is taxed per your tax slab. It will not be tax efficient for investors in the highest tax bracket.</p>.<p><strong>Debt mutual funds</strong></p>.<p> If you have invested in Debt funds which invest more than 65 per cent in debt securities the gains are added to your income and you are taxed as per the marginal tax rate. Mind you, no distinction is made between short term and long-term capital gain in debt funds. However, for debt funds having exposure to debt less than 65 per cent but more than 35 per cent, STCG will arise if your holding period is less than 36 months & taxed as per tax slabs. LTCG will arise if your holding period is more than 36 months & taxed at 20 per cent with indexation. Indexation is the process of revising the purchase price of an asset upwards to reflect the impact of inflation. This is done using the cost inflation index which is published by the Central Board of Direct Taxes (CBDT) for every financial year.</p>.<p><strong>Real estate</strong></p>.<p>The holding period for STCG is 24 months & the gains will be added to your income. LTCG will arise if your holding period is more than 24 months and the tax is 20 per cent with indexation benefit. However, you can avoid paying LTCG tax by investing in capital gain bonds or using the capital gains for purchase or construction of residential property under Section 54 of Income tax Act.</p>.<p><strong>Gold</strong></p>.<p>The holding period for STCG is less than 36 months and the gains are added to your income. LTCG will arise if your holding period is more than 36 months & tax is 20 per cent with indexation benefit. The best way to avoid paying LTCG tax is investing in Sovereign Gold Bonds and holding them till the maturity period of 8 years.</p>.<p>As we can see, the holding period for asset classes varies from 12 months to 24 months to 36 months and so is the tax. Investors expect the rationalisation and standardisation of holding periods & tax rates across asset classes. Let us hope that the FM proposes a common holding period and tax rates for debt mutual funds, gold and real estate, while keeping the status quo in equity. After all an investor takes risks in equity and s/he should be rewarded for taking risks!</p>