FM said, “We wanted to simplify the approach to taxation also for the capital gains. The average taxation has actually come down when we say it is now 12.5%. Because, we worked it out for each of different asset classes each varied with indexation. We brought it down below the average which is lowest in the last several years. It will encourage investment in the market.”
Ranjeet Naiknavare, President, CREDAI Pune Metro on the newly reduced Capital gain tax
This move by Hon FM is done to rationalise the capital gains tax across all financial and non-financial assets. The market is ready for reforms considering the fact that the Indian economy is growing. It may be noted that in India, the Long Term Capital Gain Tax (LTCG) rate is lower than the income tax and is also lower than the similar taxes in other countries like the USA, UK, China, Brazil and Australia. Now, with the simplification of capital gain tax calculations buying and selling would be easier. Secondly, the reduction of LTCG Tax to 12:5% from 20% is likely to create a positive sentiment in the market.
Such a flat rate for capital gain taxes will result in a formalized economy and also in faster transactions. Now onwards, investors will not have to wait longer for indexation benefits wherein appreciation is lower than indexation and can sell anytime due to flat capital gain tax rate.
As far as Pune is concerned, it will not have much impact because the home buying is largely done by the end users. However, this decision may act as a catalyst for increasing investments in the real estate sector because now the tax slabs are the same as stock market, gold and mutual funds but real estate is a more secured and proven investment asset with year on year good monthly returns in capital appreciation too.
Capital gain tax is still not applicable when money is used to buy another home. Sellers can continue taking exemption under section 54 of the income tax act. The section provides an exemption on the long term capital gain tax from sale of residential property if sale proceedings are used to purchase or build another residential property. However, it will impact investors who would sell their house (investment) and reinvest in other asset classes. It will impact relatively shorter-term investments of less than 5 years where market price growth is less than 10% per annum. For a longer holding period it will be beneficial where the appreciation is about 5-6% per year.
Basis on calculations it seems that if inflation is low and property price increase is faster then the new system is beneficial for sellers. It may be also noted that the Hon Finance secretary said that 95% of sellers won’t be effected by this change.
Just for the quick reference the capital gain taxes in some countries are USA capital gain tax is 0-20%, UK 10-24%, China & Japan it is 20%, Brazil is 22% and in Australia it is 15%.
