Budget 2019: Suggestions on capital gains & Section 87A provisions

When the budget is around, everyone is sending suggestions and wishes to the finance minister as to what they want the government to do for them. As a writer on income tax matters I wish to suggest some changes in the sphere of capital gains so as to remove some genuine hardship or anamologies in the existing provisions. Let us discuss what I want the finance minister to do for the common tax payers.

Rationalisation of Section 87 A for rebate available

As per the existing provisions an Individual  tax payer who is resident under the tax laws is entitled to a rebate of upto Rs. 12,500/- provided his total taxable income does not exceed Rs. 5 lakhs for the year after all the available deductions and exemptions. This rebate is available against the tax liability for all the normal income. One can also avail this rebate against tax liability arising from long term capital gains on sale of any asset other than those arising from sale or transfer of listed equity shares or equity oriented schemes on which security transaction tax (STT) has been paid. You can also claim this rebate against the tax liability arising on short term capital gains sale of  listed equity shares or equity oriented schemes on which STT has been paid. However for strange reasons, you are not allowed to avail this rebate against long term capital gains on transfer/sale of  listed equity shares or equity oriented schemes on which STT has been paid. This seems  illogical to me to allow the tax rebate for one form of capital gains and deny it against income of similar nature. It looks strange when the rebate can be availed against short term capital gains and not against long term capital gains of the same class of assets i.e. listed equity shares and equity oriented units of mutual funds.  Moreover the same is available on long term capital gains on sale of all other assets but not on listed shares and equity units which are otherwise given preferential treatment as regards holding period requirement for making them long term.

Flat rate of tax on short term capital gains

Presently any short term capital gain on any asset other than listed equity shares and unit of equity oriented schemes are taxed at the slab rate applicable to the tax payers. So in case of a tax payer other than a resident individual who is not entitled to claim rebate under Section 87A and where the total income  does not exceed Rs. 5 lakhs is liable to pay tax @ 5% on such short term capital gains included in such income. However in respect of short term capital gains on sale of listed equity shares and units of equity oriented schemes, the taxpayer has to suffer a flat rate of flat 15% if his total income does not exceed the limit of Rs. 5 lakhs. The rate of 15% on short term capital gains on such capital asset was supposed to be concessional rate of tax but for the taxpayers at the bottom of the slab rates,  the rate of 15% becomes punitive. This is an anomaly which needs to be removed so as to provide that such short term capital gains 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

The capital assets are dividend in two categories for the purpose of taxations and availing various exemptions.  Prior to 1-4-1987 the holding period requirement was 36 months for an asset to become long term.  Any asset sold before that holding period would be treated as short term and taxed accordingly. In due course the holding period requirement of 36 months was reduced to 12 months for listed equity shares and all the units of mutual funds. However the holding period requirement was restored to 36 months for units other than equity oriented units.

Presently investments in listed securities and units of equity oriented schemes become long term if you have held them for twelve months or more where as for land and building the holding period requirement is 24 months. The holding period requirement for an asset like land and building which is normally bought with an intention to hold for longer period but certainly not twenty four month which is presently prescribed.  Against this requirement of 24 months for land and building the holding period requirement for debts fund, bonds, gold, gold ETF etc is still retained at 36 months which on the face of it looks ridiculous. 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 real investment in real estate. The holding period requirement for other financial products like bonds, debts funds, gold ETF etc. should be brought down to if not 12 months then to 24 months and at the same time the holding period requirement for 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 [email protected] and @jainbalwant on twitter