Changes to Capital Gains Tax(CGT) coming?

Overview of the recent changes

As the fiscal year 2025 budget approaches, there has been a visible scramble for revenue sources. One notable option being discussed is an increase in the Capital Gains Tax (CGT) on equities. The CGT on equities, introduced in FY11, has undergone several significant changes over the years.

History of Capital Gains Tax

The Capital Gains Tax (CGT) started primarily as a tax on trading profits, targeting stocks held for less than a year. Over time, the scope of the CGT expanded to include profits from longer-term investment portfolios. In FY15, the holding period for tax exemption was set at six years. This shift was aimed at encouraging long-term investment in the stock market.

Evolution of CGT Rates

Initially, CGT was only applicable to short-term trading profits. However, as the tax structure evolved, the government introduced various slabs based on the holding period of the securities. Here is a brief history of CGT rates over the years:

• FY10 to FY14: For securities held for less than six months, the CGT was 10%. For those held between six months to a year, the rate was reduced to 7.5%, while securities held for more than a year were exempt from CGT.
• FY15 to FY22: The tax rate for securities held for less than a year was increased to 12.5% and later to 15%. For those held between one to two years, the rate was set at 10%, and for those held between two to three years, it was 7.5%. Securities held for more than three years were exempt from CGT.
• FY23: An anomaly subjected all stocks acquired before June 2022 to a 12.5% tax, which was later corrected.

Recent adjustments and Super Tax

The CGT regime has seen various tweaks to the tax slabs and holding periods. For instance, stocks acquired before FY13 were initially exempt from CGT. However, an anomaly in the FY23 Budget subjected all stocks acquired before June 2022 to a 12.5% tax. This anomaly has since been corrected.

Current CGT Rates

The table summarizing the current CGT rates for different holding periods:

Holding Period	FY23 CGT Rate	FY24 CGT Rate
<1 year	15.0%	15.0%
1-2 years	12.5%	12.5%
2-3 years	10.0%	10.0%
3-4 years	7.5%	7.5%
4-5 years	5.0%	5.0%
5-6 years	2.5%	2.5%
>6 years	0.0%	0.0%

The gains from equities are now included in the determination of Super Tax applicability, with various slabs based on annual income.

Super Tax Slabs

Super Tax is an additional tax on high-income individuals and entities. It is levied to increase government revenue and reduce fiscal deficits. The different slabs of Super Tax are as follows:

Annual Income	Super Tax Rate
<Rs150 million	0%
Rs150-200 million	1%
Rs200-250 million	2%
Rs250-300 million	3%
Rs300-350 million	4%
Rs350-400 million	6%
Rs400-500 million	8%
>Rs500 million	10%

Impact on investors

The proposed increase in CGT, if implemented, will be closely monitored by market participants. It is important to consider the relative treatment of equities compared to other asset classes. Historical disparities in CGT structures have been partially addressed in recent budgets to create a more level playing field.

Potential Investor Reactions

1. Short-Term Trading: Investors with significant short-term gains may consider selling their holdings before the new tax rates take effect to lock in profits at the current lower tax rates.
2. Long-Term Holding: Those holding securities for more than six years will benefit from the CGT exemption, encouraging longer-term investments.
3. Super Tax Implications: High-net-worth individuals and entities will need to account for the additional Super Tax when planning their investment strategies, especially if their annual income exceeds Rs150 million.

Conclusion

Investors should be aware of these potential changes and consider their implications. The uniform treatment of various asset classes and the alignment of CGT rates play a crucial role in investment decisions. Staying informed about tax policies and understanding how they impact investment returns is essential for making sound financial decisions.

Disclaimer

The information in this article is based on research by JS Research. All efforts have been made to ensure the data represented in this article is as per the research report. This report should not be considered investment advice. Readers are encouraged to consult a qualified financial advisor before making any investment decisions.