Investors in jewellery, works of art, and real estate stand to benefit from the proposed Direct Taxes Code which classifies gains on the sales of these assets as long-term if they are sold after the investor has held them for at least a year.
Under the existing Income-tax Act, which the code will supplant all assets other than equity shares and mutual fund units, need to be held for at least 36 months to be classified long-term.
The code also makes these classes of assets eligible for indexation benefits. Indexation is a facility to factor (inflate) your asset’s (like a mutual fund) cost price on account of rising inflation using an index called the cost inflation index that the Union government updates once a year.
These assets have been classified as investment assets and will be eligible for indexation benefits. Under the Bill, these assets will be considered long-term, if they are held for a period of one year from the end of the financial year. So, for instance, if a person bought any of these assets on 31 March 2010, any sale after 1 April 2011 will be considered long-term.
The code also fixes 1 April 2000 as the base date to calculate fair market value. So for example, for an asset purchased in 1995, an investor can use the fair market value on 1 April 2000 to calculate the capital gains. This may lead to a lesser tax outgo.
The code also simplifies provisions in a previous draft regarding capital gains tax on sale of equity shares or units of equity funds. Thus, units or shares held for a period of up to one year continue to be classified as short-term.
The previous draft of the code had suggested that a portion of the long-term capital gains would be taxed, but that provision has been scrapped, making long-term gains from the sale of these two categories of assets exempt from tax.
The code allows a deduction of 50% on short-term capital gains. The remainder will be taxed at applicable income-tax rates. Currently, short-term capital gains are taxed at the rate of 15%, so the new provision will mean no change.
The earlier drafts which were put up for discussion had provisions to tax long-term capital gains at par with short-term gains. But the Bill exempts long-term gains. In addition, it has provided for a 50% rebate for short-term gains. The provisions for capital gains are positive for capital markets. The rationale seems to be to encourage individual investments in equity markets and equity-oriented mutual funds.”
Additionally, investors will also now be able to reduce short-term capital gains (on paper, so that their tax liability drops further) to the extent of half of the short-term capital loss that they may incur on some other investment. However, short-term capital gains on units in all mutual funds, other than equity-oriented funds will be fully taxed according to the applicable income-tax rates, long-term capital gains continue to be taxed at 10% without indexation and 20% with indexation.