Pre-Budget Expectation Inputs - Capital Gains tax rationalization and Income Tax
Dhruv Chopra, Managing Partner, Dewan P.N. Chopra & Co.
Income Tax
- The upcoming Budget is expected to provide tax relief while balancing the government’s need to maintain revenue. Taxpayers are hoping for an enhanced rebate for lower-income individuals and an increase in the basic exemption limit under both tax regimes to help offset inflation. To help conserve taxpayers' resources, the turnover limit for taxation on a presumptive basis under Sections 44AD (for businesses) and 44ADA (for professionals) should be increased.
- Homebuyers may also benefit from higher interest deduction limits on housing loans under Section 24(b). The deduction should be allowed for the full interest paid, at least for one house, or the current limit of Rs. 2 lakh should be increased to Rs. 3 lakh.
- Faceless assessments and appeals are highly appreciated. However, there is a significant backlog in the completion of faceless appeal disposals, which now needs to be expedited in a time-bound manner. The TDS process for non-resident property sellers, which is currently cumbersome, is also expected to be simplified.
Capital Gains Tax
- A key expectation is that the exemption limit for LTCG on equities, currently capped at ₹1.25 lakh, may be increased to ₹2 lakh or higher, allowing investors to retain more of their returns. The new grandfathering rule in capital gains, which allows indexation benefits to resident individuals/HUF on the sale of residential property, needs to be rationalized. It should also be extended to other categories of assessments, such as non-residents, corporates, and other types of assets.
- There is growing anticipation for a review of Sections 54 and 54F, which provide exemptions for reinvestment of capital gains in residential properties, potentially expanding eligibility and increasing the ceiling for investment. To address the significant housing shortage in the country, the restriction on investing the sale proceeds in acquiring two residential houses should be removed, and the scope should be broadened to exempt capital gains tax if the sale proceeds are invested in creating housing stock, without any limitation on the number of units for individuals and HUF. Additionally, for claiming deductions under Section 54, the minimum holding period of the new asset should be reduced from 3 years to 2 years, in line with the minimum period for an asset to be treated as a long-term capital asset under Section 2(42A).
- Currently, exemptions under Sections 54 and 54F are limited to residential properties. These should be extended to business properties, as selling and reinvesting in business assets aims to support business growth, not generate capital gains. Expanding these exemptions would boost economic activity.
- Additionally, the threshold limit of Rs. 50 lakh under Section 54EC should be substantially enhanced to Rs. 2 crore, considering the limit was fixed in 2007. These funds are used for infrastructure development and contribute to societal welfare. These changes, along with a possible reduction in Short-Term Capital Gains (STCG) tax, could create a more investor-friendly environment, encouraging both retail and foreign investments and making India’s tax regime more competitive on the global stage.
Niranjan Govindekar, Partner, Corporate Tax, Tax & Regulatory Services, BDO India
Budget 2024 had made big changes to the capital gains tax framework, offering both challenges and benefits for investors. Some provisions need a relook. For instance, to streamline the capital gains tax structure by aligning tax rates/ period of holding across various sub-asset classes, for instance, treating international equities the same as domestic equities, debt funds the same as gold funds, and gold funds the same as gold ETFs.The hike in short-term rates from 15% to 20% and in long-term rates from 10% to 12.5% has raised investor tax liabilities significantly. Since now the LTCG tax on securities is on par with other assets, the Securities Transaction Tax (STT) should be abolished.
Budget 2024 unexpectedly removed the indexation benefit for all long-term investments in debt funds. It is expected that all investments in debt funds made up to 31 March 2023, would qualify for the indexation benefit as per earlier provisions.
Tax implications on the buyback of shares - under the amended provisions, the entire consideration received is treated as dividends and taxed in the hands of the shareholders. It is recommended that the government amend the law to allow the cost of the acquisition of shares as a reduction and tax only the net amount as a dividend.