Long Term Capital Gains Tax: An Overview for Competitive Exam Preparation

As Budget 2024 approaches, there is significant anticipation among taxpayers for potential changes in the capital gains tax structure. The complexity of current provisions has led to widespread confusion, prompting calls for legislative revisions to simplify the tax rates and rules.

The discussion around capital gains tax gained momentum after a viral video featuring Finance Minister Nirmala Sitharaman and a broker highlighted the issue.

Historical Context

The concept of capital gains tax has evolved over time, with its roots tracing back to the early 20th century. Initially introduced to tax the profits from the sale of assets, the tax has undergone numerous amendments to address economic changes and investment patterns. In India, the capital gains tax was first introduced in 1947, and since then, it has seen various modifications to align with the country’s fiscal policies and economic objectives.

Understanding Long Term Capital Gains (LTCG) Tax

Long term capital gains tax is applicable when an asset is held for an extended period. The duration that qualifies as ’long term’ varies depending on the type of asset:

1. Securities and Equity-Oriented Funds:

   • Holding Period: More than one year.
   • Tax Rate: 10% without indexation benefit, applicable if gains exceed ₹1 lakh.
   • Unlisted Shares: Holding period is 24 months for LTCG tax to apply.

2. Land and Building:

   • Holding Period: More than two years.
   • Tax Rate: Gains are taxed as per LTCG provisions with indexation benefits, which help reduce tax liability.

3. Debt Funds:

   • Holding Period: Previously eligible for LTCG tax, but now gains are taxed as short term capital gains at the applicable slab rate if held for less than 35% in equity.

Summary

• Budget 2024: Anticipated changes in capital gains tax structure.
• Historical Context: Capital gains tax introduced in 1947, with multiple amendments over time.
• LTCG Tax:
  • Securities and Equity-Oriented Funds: 10% tax rate after one year, gains over ₹1 lakh.
  • Unlisted Shares: 24-month holding period.
  • Land and Building: Taxed with indexation benefits after two years.
  • Debt Funds: Now taxed as short term capital gains.

Understanding these nuances is crucial for competitive exam preparation, as it provides a comprehensive view of the current tax landscape and its historical evolution.