WITH NO CHANGE IN CAPITAL GAINS TAX INTRODUCED IN BUDGET 2023, A DEEP DIVE INTO THE HISTORY OF CAPITAL GAINS TAXATION

Every year, with the introduction of the union budget comes the question - What are my stocks going to be taxed at?  The answer this year is that there is no change in capital gains tax for financial assets such as Stocks, Mutual Funds etc. in Budget 2023. 

With no changes in the capital gains in budget presented by Finance Minister Nirmala Sitharaman, let’s have a look at the history of capital gains taxation in India.

History of Capital Gains taxation in India

Capital gains are profits earned by an investor on selling of assets in the capital markets. Any stock held for more than one year is considered under Long Term Capital Gains(LTCG) tax. For stocks held under one year is considered under Short Term Capital Gains(STCG) tax.

Currently, capital gains are taxed at 10% for Long Term Capital Gains (exempt up to ₹1lakhs), and 15% for Short Term Capital Gains.

Taxation on stocks:

• Since introduction to 1948: Capital gains were taxed in a progressive manner much like our income tax today where taxes up to ₹15,000 were exempt. More than ₹15,000 was taxed at a progressive rate with the highest bracket of more than ₹10,00,000 being taxed at 31.3%.
• In 1949, taxation on capital gains was abolished as it was believed to be hampering the growth of the stock market.
• 1957 to 1992: The taxation on capital gains was made permanent with the aim to increase tax revenue.
• 1992 - 1999: Till 1991, the taxation was done at individual’s slab rates but its major flaw was that inflation was not taken into account. Then Finance Minister Dr. Manmohan Singh, introduced the concept of indexation that inflates the cost of acquisition with the inflation rate reported by the government every year. The 1992 Union budget also introduced a special provision for LTCG that levies 20% tax (with indexation) applicable from April 1993. Holding period for LTCG was 1 year for Stocks and 3 years for immovable property and gold.
• 1999 - 2004: Finance minister Yashwant Sinha capped the tax at 10%. Taxpayers could avail tax of 20% with indexation benefit or 10% without it.
• 2004 - 2018: In 2004, Finance Minister P Chidambram abolished tax on LTCG and introduced STT (a tax levied on sale and purchase of shares). It was a landmark decision which led to the expansion of Indian capital markets. (approx. 5x growth from 2004-18). Short term capital gains were also reduced to 10% from 15%. (which was later increased to 15% in 2008).
• 2018 - Present: LTCG tax was reintroduced in 2018 at 10% (with gains up to ₹1,00,000 being exempt). STCG tax remains at 15%.

Now let’s understand the current tax regime with an example:

Short term capital gain tax

Mr A bought 100 shares of Larsen & Toubro ltd at Rs 950 per share on 8^th June2020 and sold the same 100 shares of Larsen & Toubro at Rs 1500 per share on 15^th February 2021 within 1year (less than 12 months).

LARSEN AND TUBRO (INE018A01030), HOLDING PERIOD = 8 MONTHS 6 DAYS

Gain on Larsen & Toubro is Rs. 55,000/-.

Short term capital gain tax = 55000 X15% = 8250.

Long term capital gain tax

Mr P bought 200 shares of Titan Ltd. At Rs 820 per share on 27^th November 2017 and sold the same 200 shares of Titan at Rs 1700 per share on 1^st July 2021

TITAN (INE280A01028), HOLDING PERIOD= 3 YEARS 8 MONTHS

 Long Term Capital Gain = 176000 (Up to Rs 100000 is not taxed as per the provision)

Long term capital Gain Tax= (176000-100000)    = 76000 X 10% = 7600

Dividend Tax History:

How are losses treated & can it set off against future profit?

Any Unadjusted losses can be carried forward up to 8 years. However, if there is any capital loss, then file it before due date to carry forward the loss and then set off from the capital gains arising in future. Short term capital loss can be carried forward up to 8 years and can be set off against short term capital gain and long-term capital gain before taxation. Long term capital loss can be carried forward for up to 8 years and can be set off against long term capital gains only before taxation.

What are taxation on equity intraday transactions?

Intraday-day trading (speculative business income)- If the shares are bought and sold regularly in a short duration then this is not considered to be under capital gains but under speculative business income as per income tax section 43(5). The gain from this type of income is taxed under business income and is taxed as per the assesses tax slab rate.

Long term Capital Gain= Sale value - Cost of acquisition

What is concept of Grandfathering? Can you explain with an example that how long term capital gains will be calculated on sale of shares? What will be the cost of acquisition?

Sale value means the consideration received on the sale of equity share. The concept of Grandfathering means that any gain calculated upto 31^st Jan 2018 i.e. taking the highest price of the stock as on Jan 31, 2018, will not be chargeable to tax. This price as on Jan 31, 2018 is the fair market value as on Jan 31, 2018.

Gains on stock after Jan 31, 2018, will be chargeable to tax of 10% provided the shares are sold on or after April 1, 2018. Please note, If the shares are sold on or upto March 31, 2018, any long term capital gain will be exempt from tax.

What is Tax Loss Harvesting-?

Tax-loss harvesting is the practice of selling a share that is incurring a loss, so that by realizing the loss, you can offset the same against realized gain for the same year and save on taxes. The security has to move out of the demat account by delivery sell transaction and the sold security is replaced by the same or a similar security.

Taxation on Futures & Options

Gains from F&O are not considered capital gains but business income. As these are considered non-speculative business gains, income tax is levied according to the applicable tax slab rates.

History of STT on Derivatives:

Equity and derivatives transactions in the stock exchange have been attracting securities transaction tax (STT) since 2004. There have been substantial changes in STT rates after that - For example, the rates of STT on equity and on F&O have been substantially brought down compared to what they were in 2004. Secondly, there has been a fine tuning of the definition of volumes in case of derivatives.

So, while the STT on futures transactions is still imposed on the notional value of the transaction, the STT on options transactions is imposed on the premium value of the transaction. With effect from September 1, 2019 where options are exercised, STT at the prescribed rate are levied on the intrinsic value instead of the settlement price as that was before. Further with regards to intrinsic value has been defined as the difference between the settlement price and the strike price of the options

The above Graph shows the contribution of Future and options towards equity derivatives turnover. We can see how the share of futures with a peak of 89% in 2004-05 has constantly moved down to 1% in recent times.

The STT payable on 1 lot of options is substantially lower than the STT payable on 1 lot of futures. This is despite the fact that the STT on options had been recently hiked 3-fold from 0.017% to 0.05%. The reason is that options are charged STT on their premium value while futures are charged STT on their notional value. This has been one of the key reasons for the rapid growth of option volumes in India.

TAXATION OF OTHER ASSET CLASSES:

• Gold and Immovable Property

For immovable property, LTCG is considered for assets held for more than 24 months. For Gold, it is considered for gold held over 36 months. Tax rate being 20% for both.

• Mutual Funds

Mutual funds are taxed as per the category they fall in. Different type of mutual funds and their applicable tax rates are mentioned below.

(Source: Cleartax)

What are Securities Transaction Tax (STT)?

STT is a kind of financial transaction tax which is similar to tax collected at source (TCS). STT is a direct tax levied on every purchase and sale of securities that are listed on the recognized stock exchanges in India.

 (Source: Cleartax)

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