Budget 2025 Expectations: Experts urge FM Sitharaman to fine-tune policies around capital gains tax rationalisation – Budget 2025 News

With Finance Minister Nirmala Sitharaman all set to announce Union Budget 2025 on February 1, tax experts are hoping for the government to relook at the provisions announced in the previous Budget around the capital gains tax framework. While tax rationalisation has been a recurring theme in the past few Budgets, and the finance minister had, in the previous Budget, made notable announcements to capital gains tax, this time around, any significant tax reforms look unlikely. Even so, experts are anticipating minor adjustments aimed at fine-tuning existing policies
Budget 2024 had made big changes to the capital gains tax framework, offering both challenges and benefits for investors. With the Budget presentation date approaching, experts said that capital gains tax rationalisation is one of the key areas that everyone has been focusing on. 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.
In the last Budget, the government had rationalised the capital gains structure in terms of holding period of assets and tax rates. Sameer Gupta, National Tax Leader, EY India, said, “The government may further address some of the unintended anomalies to make the rationalisation of capital gains more complete. For instance, the holding period for capital assets, such as business undertakings in slump sales may be reduced from 36 months to 24 months and unlisted shares in IPO Offer for Sale (OFS) (from 2 years to 1 year), aligning them with listed securities. Exemptions for sovereign wealth and pension funds investing in infrastructure should be clarified to preserve their eligibility for long-term capital gains benefits.”
Capital gains tax regime was substantially rationalised during the last Budget by providing for a uniform rate of tax viz 12.5 per cent for all long term capital assets. Punit Shah, Partner, Dhruva Advisors, said, “The law was also amended to consider gains on any unlisted debt instrument as short term capital gain. There is a case to relook at this provision and rationalise it to again make it at par with other capital assets.”
Experts said that the government has often balanced between making changes to encourage investment and maintaining revenue targets. Sofiya Syed, Direct Tax Division, Dewan PN Chopra & Co, maintained 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.
Bijal Ajinkya, Partner at Khaitan & Co, further added, “In the backdrop of the promise of simplifying the tax laws, a rationalization of the capital gains tax rate is imperative. India’s tax laws are unique where there is a different capital gains tax rate for different classes of assets. Having a different tax rate for long term and short term assets is acceptable as a global practice but different rates for different classes is not in vogue in developing or developed countries.”
Niranjan Govindekar, Partner, Corporate Tax, Tax & Regulatory Services, BDO India, said, “The hike in short-term rates from 15 per cent to 20 per cent and in long-term rates from 10 per cent to 12.5 per cent 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.”
While maintaining that the previous Budget unexpectedly removed the indexation benefit for all long-term investments in debt funds, he said, 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 acquisition of shares as reduction and tax only net amount as dividend,” Niranjan Govindekar said.
Meanwhile, Nirmala Sitharaman recently finished her month-long consultations with industry and sector stakeholders that started on December 6, 2024. In a statement, the Finance Ministry said, “The consultations started on December 6, 2024. In the course of the in-person consultations, more than 100 invitees across 9 stakeholder groups, including experts and representatives from farmer associations & agriculture economists; trade unions; education & health sector; MSME; trade & services; industry; economists; financial sector & capital markets; as well as, infrastructure, energy and urban sector, participated in the meetings.”
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