I wish to give some suggestions to the Union Finance Minister to make the taxation on capital gain more rational by removing some anomalies. Here are my suggestions.
Rebate available under Section 87 A for capital gains
Section 87 A allows a resident individual a tax rebate tax upto Rs12,500, if his total taxable income does not exceed Rs5 lakhs for the year. The income to be considered for this purpose is the final taxable income arrived at after claiming all deductions and exemptions. This rebate is available against all your tax liability of any nature except long-term capital gains on sale or transfer of listed equity shares or equity oriented schemes, on which security transaction tax (STT) has been paid.
Even you can claim this rebate against your tax liability on short-term capital gains from listed equity shares or equity oriented schemes, on which STT has been paid i.e. the same category of assets.
I am unable to understand the strange reasons for such discrimination. In my opinion, it is illogical to allow rebate against short-term capital gains and not against long-term capital gains of the same class of assets. Does the government want people to invest in equity products for short duration, which prudently is not advised?
It is interesting to note that this rebate is available on long-term capital gains on sale of all other assets. Logically, it should be allowed on listed shares and equity units which are otherwise given preferential treatment as regards rate of tax payable on capital gains and holding period requirement for making them long term.
Flat rate on short term capital gains
The short-term capital gains of any nature, referred to as other short-term capital gains, except on listed equity shares and equity schemes are taxed at the slab rate applicable to you. So, in case of a non-resident individual, who is not entitled to claim rebate under Section 87A, and whose income doesn't exceed Rs5 lakhs, is taxed at five per cent on such other short-term capital gains included in such income. However, short-term capital gains on listed equity shares and equity schemes are taxed at a flat rate of 15 per cent even if his total income doesn't exceed the limit of Rs 5 lakhs where the regular slab rate is five per cent. The 15 per cent tax on short-term capital gains is supposed to be a concessional rate of tax but for the taxpayers at the bottom of the slab rates, 15 per cent tax rate on short-term capital gains becomes punitive as against applicable rate of five per cent for other short-term capital gains. This is an anomaly, which needs to be removed by providing that short-term capital gains on equity shall not be taxed at a rate higher than the marginal slab rate applicable to the taxpayer.
Rationalisation of holding period of various capital assets
For the purpose of holding period requirement, the capital assets are dividend in two categories.
Prior to 01-04-1987, a period of 36 months was the holding period for all classes of assets to become long term. Any asset sold before that holding period was treated as short term and taxed accordingly and held for more than 36 months was treated as long term. Later on, the holding period requirement of 36 months was reduced to 12 months for listed equity shares and all the units of mutual funds (MFs). However, the holding period was again changed to 36 months for units other than equity schemes like debt funds/gold funds, etc.
So, as of today, investments in listed securities and equity schemes become long-term after twelve months, but for land and building you have to hold them for 24 months. For an asset like land and building which is normally bought with an intention to hold for longer period, but certainly not 24 months, the requirement of 24 months prescribed also seems illogical to me. Against this requirement of 24 months for land and building the holding period requirement relatively liquid assets like debts schemes, bonds, gold, gold ETF, gold funds, etc., is still 36 months, which on the face of it looks irrational. In my opinion the lower holding period requirement of 24 months for non-financial asset like land and building gives impetus to speculation in these assets instead of channelling genuine and long-term investment in real estate sector. The holding period provisions for other financial products like bonds, debts funds, gold ETF, etc., should be brought down to if not 12 months then at least to 24 months. At the same time, the holding period requirement for all non-financial assets should be raised to if not 60 months then at least to 36 months to make the holding period requirement rational and reasonable based on the nature of the capital asset.
I hope the finance minister is listening.
The writer is a tax and investment expert and can be reached on firstname.lastname@example.org and @jainbalwant on his twitter handle.