Finance Bill 2024 now stands enacted with approval from both Houses of Parliament and assent by the President. Among the key changes impacting Foreign Portfolio Investors (FPI) is the increase in tax rates on both short-term and long-term capital gains derived from equities, units of equity oriented mutual fund and rationalization of holding period for certain capital assets.
India maintains competitive edge despite recent tax rate hike
Under the new capital gain regime effective from 23rd July 2024, short-term capital gains on equities will now be subject to a 20% tax rate (previously 15%). Similarly, long-term capital (LTCG) gains will now be subjected to tax at 12.5%, (previously 10%). A marginal increase of the exemption limit on LTCG from ₹1 lakh to ₹1.25 lakh per financial year has been made.
Even with these hikes, India's capital gains tax rates remain low compared to various other countries, including few Asian countries. A comparison of capital gain tax rate of countries like, Australia, Canada, Japan etc. is depicted in the table.
Country | Capital Gains tax rate |
Australia | 30% |
Canada | 25% |
China | 10% |
France | 25% |
Italy | 26% |
Japan | 25.59% |
Korea | 22% |
South Africa | 21.6% |
Rationalisation of holding period of capital assets
The period of holding required for an asset to qualify as a long-term capital asset has been standardized- 12 months for listed financial assets and 24 months for unlisted financial assets and non-financial assets. Hence, there is now parity in period of holding across asset classes. For instance, the holding period for units of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trust (InvITs) has been reduced from 36 months to 12 months, bringing it at par with equity.
Another important Budget amendment is in respect of capital gains from sale of unlisted debentures and unlisted bonds which are transferred, redeemed or mature on or after 23rd July 24, which will now invariably be classified as short-term, irrespective of the holding period. Such Capital Gains will be taxed at applicable slab rates. This will notably impact FPIs which transfer, redeem or hold to maturity such unlisted bonds and unlisted debentures on or after 23rd July 2024.
These changes are expected to provide greater clarity and simplicity in the capital gains tax structure, making it easier for investors to navigate the tax implications across various asset classes.
Harmonization of tax treatment of buyback with dividend
To harmonize the tax treatment of buyback with dividend, the new rules abolished the buyback tax on corporates with effect from 1st October 2024. This change will shift the tax burden from companies to shareholders. Shareholders will be taxable on the entire sum received under the buyback announced on or after 1st October in the form of deemed dividend income.
However, it is important to note that the cost of purchase will not be deductible from this deemed dividend income. Instead, cost is to be treated as capital loss which can be offset against capital gains. Where the investor is a non-resident entity, the lower rate of tax on dividend provided under tax treaty between India and the respective home country can be claimed.
Settlement scheme to Expedite Resolution of Tax Disputes
In response to the growing backlog of income tax disputes, the Government plans to bring back Vivad se Vishwas Scheme (VSV) - a direct tax dispute resolution scheme. This scheme was initially launched in 2020 and received a positive response from taxpayers. In view of the increase in pendency of appeals, the Government is now proposing to introduce Vivad Se Vishwas Scheme, 2024 with the objective of providing a mechanism of settlement of disputes, thereby reducing litigation without much cost to the exchequer.
The investors and traders will need to adapt their strategies to the new laws as they take effect. However, the overall prospects for investing in India's capital markets remain positive, supported by strong economic fundamentals and a more streamlined tax environment.
A version of this article was published in The Financial Express Online on September 01 2024. The same can be read here
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