Relaxation and clarity expected in Budget 2020 on capital gains tax

Relaxation and clarity expected in Budget 2020 on capital gains tax

In order to encourage small taxpayers to invest in the stock market, the government may consider raising the Rs 1 lakh limit to tax long-term capital gains from the transfer of such equity shares and equity-oriented funds units.

The aspirations of individual tax-payers are strong with the annual budget around the corner. Given the recent decline in corporate tax rates, individual taxpayers still expect tax rate cuts and relaxations to come their way.

Long-term capital gains on the selling of stock shares and equity-oriented fund products. The recent years have seen reforms in the taxation of capital gains that have raised the tax burden on individual taxpayers. For example, for transactions made on or after April 1, 2018, the long-term capital gains (LTCG) exceeding Rs 1 lakh on the selling of equity shares and equity-oriented funds units on which Securities Transaction Tax (STT) is paid, previously tax-exempt, is taxed at 10 percent.

In addition, the Government may also consider specifying a holding period (i.e. 5 years) and, where such shares or units are transferred after the specified holding period, long-term capital gains may be considered exempt.

Time limit for completion of construction under sections 54 and 54F

In the case of immovable property, a welcome step would be to increase the time limit for building house property to use exemption under sections 54 and 54F. The cap is actually to build a new house within three years from the date of selling the old one. In many cases, however, building completion takes longer.

In spite of this, to avoid taxpayers ‘ suffering due to loss of exemption due to the failure to finish construction, the time limit for building a house under section 54 and section 54F could be extended to 5 years. This is in accordance with the time limit for the deduction of interest on housing loan provided for under section 24 as amended by the Finance Act, 2016.

First-year for calculating the indexed cost of acquisition

According to the joint reading of Explanation, 1(b) to Section 2(42A) and Section 49(1) of the Income Tax Act, 1961, the holding period of the previous owner shall be considered in deciding the holding period of the capital assets obtained by the taxpayer through certain acquisition methods, such as gifts or inheritances. However, as provided for in Section 49(1), the expense of purchase about such properties shall be determined based on the previous owner’s costs.

However, based on a literal reading of the Explanation to Section 48, it is possible that the indexing cost inflation index for such long-term capital assets should only be considered from the date on which the taxpayer first held the asset (and not from the date on which the previous owner first held that asset).

 

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