Finance Minister Nirmala Sitharaman will announce the Union Budget 2023 shortly. Stock investors would be interested in the announcements regarding the long-term capital gains LTCG on equities. There are expectations that the FM could change the LTCG tax rate or holding period for stock investments to be considered long term. If that happens, the short-term market volatility is likely to occur, according to analysts.
The government could take steps towards rationalizing LTCG on equity in order to make it homogenous across asset classes, including debt and property, said Nuvama Institutional Equities. It noted that LTCG applies to equity investments on a holding of one year or above. The holding period for debt mutual funds is three years or above, while the holding period for property is two years or above.
The changes in the capital gains tax structure could cause immediate volatility in the market, according to the capital market perspective. The government can look at uniformity across similar asset classes, especially in terms of holding period, tax rate, amongst others, as per the general consensus this time around. Sharekhan believes uniformity in the holding period for LTCG is more likely to happen.
The tax rates are different across asset classes. Equities attract 10 per cent of the LTCG tax without indexation. Long-term capital gains with indexation are taxed at 20 per cent for debt mutual funds and real estate.
Nuvama said that LTCG tweaks may cause short-term volatility and that there may be some rationalisation with regard to tax rates or holding periods.
If the holding period on equity investments is increased or the LTCG rate increases, it can have a negative impact on markets, said Quantum Securities. HDFC Securities expects FM to leave capital gains taxation unchanged.
The LTCG tax on unlisted stock held for more than 24 months is double that of listed equity shares held for more than 24 months.
For a year. Unlisted stocks attracts LTCG of 20 per cent against 10 per cent for listing stocks. There are hopes that the LTCG tax on unlisted shares could be brought down to 10 per cent level.