The government may rationalize the long-term capital gains (LTCG) structure in the upcoming Budget, according to certain media reports. If this move gets implemented, it might create parity across similar asset types in terms of tax rates and holding periods. Units of equity-linked mutual funds must be held for 12 months in order to qualify as a long-term asset, whereas debt-oriented mutual funds must be retained for 36 months. There is also a variation in the rates. While the rate for units of debt-oriented mutual funds is 20 percent (with indexation), the units of equity-linked mutual funds are subject to LTCG tax at a rate of 10 percent.
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Tax experts believe that the unresolved difficulties surrounding the grandfathering of listed shares for LTCG calculation should also be rectified. Grandfathering is a situation in which a new rule is declared for all cases beginning on a specific date, even though the previous rule is still in effect for prior cases. In accordance with the Finance Act of 2018, the LTCG deriving from the sale of listed shares on or after 1 April 2018, was subject to a 10 percent (without indexation) tax.
However, the value increase of the listed shares from the date of purchase through 31 January 2018 was “grandfathered” if they were purchased before 1 February 2018. If their actual cost of acquisition was less than this ‘fair market value’, taxpayers have the option of using the market price (fair market value) as of 31 January as the buying price.
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According to what Mahendra Sanghvi, chartered accountant and former president of the Chamber of Tax Consultants (CTC) told Times Of India, though under Section 55(2)(ac) of the Income Tax (I-T) Act, the shares must be purchased before 1 February 2018, it is unclear if this condition should be followed in the situation of a subsequent acquisition.
The CTC noted in its pre-Budget memo that mergers can also pose a problem. Additionally, it suggested that the cost of acquiring bonus shares should not be zero but rather the pro-rata cost of acquiring the initial shares. This will align it with the tax treatment for stock splits and simplify the capital gains tax structure.
