Small investors turned out to be a lucky lot with the government softening the rules for taxing capital gains in the discussion paper on Direct Taxes Code (DTC) draft. The difference in treatment of the gain based on a short-term or long-term holding coupled with percentage deduction on the capital gains would ensure that the proposed regime is less painful for them than the larger investors, although it could be still much harsher than the current regime.
The move to impose capital gains tax for long-term gains (there is no long-term capital gains tax on listed securities at present), could hit foreign institutional investors(FIIs), with resultant adverse effect on capital flows into India.
On assets like listed equity shares or an equity fund which are held for more than one year, the new draft has proposed a percentage deduction on the profit or gain that will bring down the effective tax rate for an individual.
Experts feel that the middle path government has taken with regard to capital gains tax for individual investors has surely reduced the burden when compared to the first draft. ??Compared to the current regime, the discussion paper proposals are still harsh??, said Suresh Swamy, executive director PricewaterhouseCoopers.
At present, while there is no long-term capital gains tax for listed equity shares and equity-oriented funds, short-term (less than a year) gains are taxed at 15%. As against this, the new proposal is to have effective tax rates for gains from one year plus holding, ranging from 3-5% for taxpayers with personal marginal rate of 10%, 6-10% for those with marginal rate of 20% and 9-15% for taxpayers in the highest slab of 30%. In the case of such capital gains from equity shares for less than a year, the gains would be treated as ordinary income and taxed at the respective rates. The government claims that the proposed regime for taxation of capital gains would be beneficial to low and middle-income category of taxpayers.
The initial DTC draft had talked about a flat 30% tax rate on all capital gains?both long and short term. If the new proposals are to be implemented, on a capital gain of Rs 100, the percentage deduction would be Rs 50 (at 50%). Following this depending on the tax bracket the individual comes in he would pay a tax. If he comes in a slab of 20%, tax would be Rs 10 (20% of Rs 50). Effective tax rate here on Rs 100 capital gain would be 10%.
Another expert NC Hegde, partner, Deloitte said,??The reduction in the effective rate of capital gains by providing a specified percentage deduction does provide some relief to investors in general with taxpayers in the lower tax bracket being given a greater slice of the benefit.??
He, however, added that FIIs will now have to pay tax on long term capital gains at reduced rates instead of nil at present. They will also have to shell out higher taxes on short term capital gains.