The Finance Ministry is looking at rationalizing long-term capital gains tax structure by bringing parity between similar asset classes and revising the base year for computing indexation benefits.

What is Capital Gains Tax?

• Capital gains tax is levied on the profits made on investments (Base Year: 2001).
• It covers real estate, gold, stocks, mutual funds, and various other financial and non-financial assets.

• Under the Income Tax Act, gains from sale of capital assets — both movable and immovable — are subject to ‘capital gains tax’.

Types of CGT

(A) STCG (Short-term capital asset)

• An asset held for a period of 36 months or less is a short-term capital asset.
• The criteria is 24 months for immovable properties such as land, building and house property from FY 2017-18.
• For instance, if you sell house property after holding it for a period of 24 months, any income arising will be treated as a long-term capital gain, provided that property is sold after 31st March 2017.
• The reduced period of the aforementioned 24 months is not applicable to movable property such as jewellery, debt-oriented mutual funds etc.

Some assets are considered short-term capital assets when these are held for 12 months or less. This rule is applicable if the date of transfer is after 10th July 2014 (irrespective of what the date of purchase is). These assets are:

1. Equity or preference shares in a company listed on a recognized stock exchange in India
2. Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India
3. Units of UTI, whether quoted or not
4. Units of equity oriented mutual fund, whether quoted or not
5. Zero coupon bonds, whether quoted or not

(B)  LTCG (Long-term capital asset )

• An asset held for more than 36 months is a long-term capital asset.
• They will be classified as a long-term capital asset if held for more than 36 months as earlier.
• Capital assets such as land, building and house property shall be considered as long-term capital asset if the owner holds it for a period of 24 months or more (from FY 2017-18).

Whereas, below-listed assets if held for a period of more than 12 months, shall be considered as long-term capital asset.

1. Equity or preference shares in a company listed on a recognized stock exchange in India
2. Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India
3. Units of UTI, whether quoted or not
4. Units of equity oriented mutual fund, whether quoted or not
5. Zero coupon bonds, whether quoted or not

Why is it so complicated?

Capital gains tax is complicated for a few primary reasons.

• First, the rate changes from asset to asset. LTCG tax on stocks and equity mutual funds is 10% but on debt mutual funds is 20% with indexation.
• Second, holding period changes from asset to asset. The holding period for LTCG tax is two years in real estate, one year for stocks, and three years for debt mutual funds and gold.
• Third, exemptions available against it come with their own complex conditions. For instance, buying a house after selling one can get you an exemption, but the new house must be bought in two years or built in three years of the sale.

Stipulated reforms by Finance Ministry

• Currently, shares held for more than one year attract a 10% tax on long-term capital gains.
• Gains arising from sale of immovable property and unlisted shares held for more than 2 years and debt instruments and jewellery held for over 3 years attract 20% long-term capital gains tax.
• Also, a change in base year for computing inflation-adjusted capital gains is being contemplated.
• The index year for capital gains tax calculation is revised periodically to make it more relevant. The last revision took place in 2017 when the base year was updated to 2001.
• Since the prices of assets increase over time, the indexation is used to arrive at the inflation-adjusted purchasing price of assets to compute long-term capital gains for the purpose of taxation.

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