Union Budget 2025 | Tax experts seek rationalisation of capital gains tax

With Union Budget 2025 on the horizon, tax experts and investors are keenly watching out for some relief proposals in the tax slabs and capital gains tax rationalisation is one of the key areas that everyone has been focusing on.

In the last Union Budget, the government had rationalized the capital gains structure in terms of the holding period of assets and tax rates. However, this time around the tax experts are hoping for the government to relook at the provisions around the capital gains tax framework.

Speaking on this front, Sofiya Syed, Direct Tax Division, Dewan P N Chopra & Co., said, "Some of the key demands for the rationalization of capital gains tax include lowering tax rates on long-term capital gains, revising the thresholds for LTCG tax, enhancing indexation benefits, increasing threshold limits of deductions like 54, 54F, etc., and other similar measures." 

Sofiya Syed said that the finance minister is likely to weigh the potential revenue impact of any changes and whether it aligns with broader economic goals.

"Given the current economic priorities, such as boosting consumption, job creation, and handling fiscal deficits, tax rationalization could be linked with broader reforms. The FM's stance on capital gains tax rationalization will likely depend on a careful assessment of how much the government can afford in terms of tax cuts while still balancing its budgetary goals. While it's uncertain if the FM will concede fully to the demands of capital gains tax rationalization, the market continues to expect some changes that could benefit long-term investors," said Sofiya Syed.

Niranjan Govindekar, Partner, Corporate Tax, Tax & Regulatory Services, BDO India, said, "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,"

Govindekar added, "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."