Although many taxpayers anticipated the possibility of capital gains tax rationalisation in Budget 2024, not many were expecting the tax rates to be raised, said Saumya Aggarwal, assistant professor, department of commerce at Shri Ram College of Commerce, University of Delhi. In a telephonic interview with MintGenie, Aggarwal also spoke about the National Pension System Vatsalya (NPS Vatsalya) scheme, the government’s emphasis on the new tax regime and the higher tax rate levied on short-term capital gains (STCG).
Edited excerpts from the interview.
What do you think about the removal of indexation from LTCG?
The government has removed indexation. An increase in capital gains tax is not a positive development. It could increase capital gains tax avoidance.
LTCG has been raised from 10% to 12.5% in sale of securities. What do you think about this?
Everyone had an idea about possible tweaks in capital gain tax. However, the increase in tax rates was not anticipated. Earlier, there used to be confusion in the capital gains and different rates were levied on different assets, and then there were different time periods that determined whether the gain was short term or long term. So, the legislation was meant to be simplified. But rather than simplifying, they have raised the rates.
Now, multiple rates are clubbed into one, i.e., 12.5 per cent — which is lower than the tax rate on short-term capital gains.
The short-term capital gain is typically taxed at a higher rate than the rate of LTCG in order to encourage long-term investment. Earlier, the tax rate of STCG was 15 per cent, and now it is 20 per cent against 12.5 per cent for long-term capital gains. So, it is better to stay invested for a longer duration.
What do you think about the Budget 2024 with regard to other changes?
They have now introduced NPS Vatsalya for kids. The idea is to nudge people into migrating from PPF to NPS.
One thing which I like, as an academic, is the government’s emphasis on skill development and employment. The government has urged companies to spend money out of CSR to hire more and more interns. This is a very positive development to learn and work with the top companies.
Do you suggest taxpayers should shift to the new tax regime and stop making investments in tax-saving instruments?
I am carrying out research on the new tax regime. We believe that in the long run, they will do away with the old tax regime. They are currently testing the market and doing everything to make this regime more interesting.
However, my personal opinion is that investment needs to be promoted. In India, people have a habit of investing in gold. When there are no tax benefits in PPF, term insurance, or medical insurance policy — investors get discouraged. Whereas, investment should be promoted.
What other tax-related changes did you like or did not like?
I personally liked the fact that tax law with respect to capital gains was simplified. Also, the way NPS is being promoted is good. The deduction of expenditure by employers towards NPS is proposed to be increased from 10 to 14 per cent of the employee’s salary.
However, more can be done with respect to the capital gains tax structure.