Capital gains tax Budget 2023: Tax regime very complex; investors seek changes, finds TOI-Deloitte Survey


Union Budget 2023: Finance Minister Nirmala Sitharaman should raise the annual tax-exempt limit of Rs 1 lakh for long term capital gainssay majority of participants in a pre-Budget 2023 TOI-Deloitte Survey. Over 93% respondents in the survey said that the limit should be raised.
FM Nirmala Sitharaman will present the Union Budget 2023 on February 1, 2023. The Budget session of the Parliament begins on January 31, 2023. The TOI-Deloitte Survey covered several categories of participants; Common person/Individual taxpayer, retail investors, start-ups, corporate and economy.

Simplification of Capital gains regime

Participants in the retail investors category are of the view that the present capital gains tax regime is very complicated. Over 67% respondents said that the capital gains tax regime is not simple.

Saraswathi Kasturirangan, Partner at Deloitte India acknowledges that the current capital gains tax regime in India is complex. “The holding period to identify whether the capital gains earned is long-term or short-term, varies based on the nature of the asset. The rate of taxes, availability of indexation benefits are also asset specific,” she tells TOI.
The table below provides an overview of the current capital gains taxation regime for a resident individual.

Asked about what changes can be brought about to make the capital gains tax regime simpler, 58% respondents said Budget 2023 should standardise 1-year as the period of holding for long term gain, irrespective of the nature of the asset.

With regards to the capital gains tax structure of investment options like shares, mutual funds and insurance, over 80% said it is still very complex since asset classes are taxed differently.

According to Saraswathi, “The government can consider rationalising the holding period rules. As against the current 3 categories of holding period, the expectation is that this is simplified at least to 2 categories,” she said.
“For instance, capital gains on listed shares is considered as long term if the period of holding is 12 months. REITs and InvITs are categorised as long-term capital assets if held for at least 36 months, which may be standardised at 12 months, instead of 36 months. On similar lines, the holding period for non-equity mutual funds may be brought down to 24 months to qualify as long-term assets,” she explained.

Tax policies & benefits for homebuyers

Does taxation policy play a big role in retail investors’ choice of an investment instrument? Yes, say over 78% of the participants. Deloitte’s Saraswathi is of the view that most investors would consider the post-tax returns while comparing investments, and hence taxation policy has a significant impact on determining investments.

“For instance, even within mutual funds, the taxation for equity oriented Vs non-equity oriented mutual funds is very different,” she notes.
Almost 70% respondents in the retail investors category believe that the government should extend tax benefits announced for first-time homebuyers and affordable housing. Budget 2019 had introduced a tax incentive for first time homebuyers with an additional deduction of Rs 1.50 lakh per year on the home loan interest payment over and above the Rs 2 Lakh per year available to all. The eligibility criteria was that the home loan was to be sanctioned between April 1, 2019 and March 31, 2020, which was extended to March 31, 2022.

Deloitte expects that the timeline will further be extended. “Further, the existing condition of having stamp duty value of residential house property not exceeding Rs 45 lakhs may be revisited and the limit may be further enhanced,” says Saraswathi.

Investment in foreign markets & road ahead for digital rupee

Over 55% participants are not aware of options to invest in foreign financial markets.

Those who are willing to invest in foreign stock markets say they would prefer to do so through India based ETFs, FoFs by Indian Mutual Funds or directly in stocks through brokerage services in India.

The Reserve Bank of India (RBI) recently launched a pilot project for the launch of the Central Bank Digital Currency (CBDC) or the digital rupee. The RBI broadly defines the CBDC as the legal tender issued by a central bank in a digital form.
So will the digital rupee become a more popular form of settling digital payments than UPI? Participants in the retail investors survey said it is too early to tell.

Digital rupee is akin to sovereign paper currency but takes a different form, exchangeable at par with the existing currency and shall be accepted as a medium of payment, legal tender and a safe store of value.
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