Long-term capital gains taxation

Why in news?

The current debate on whether Union finance minister Arun Jaitley should reintroduce taxation of long term capital gains (LTCG).

Idea behind taxation on capital

Taxes on capital incomes will encourage people to switch from future consumption to current consumption. The savings rate will fall as a result—and so will the economic growth needed to create jobs.

Taxes on capital income are actually a form of double taxation. Shareholders who have already paid taxes on the profits of the companies they own should ideally not be expected to pay a further round of taxes on the dividends they get or the capital gains they book (the latter being the net present value of future profits after tax).

What should be taken care of before implementing a tax on capital?

  • First, it should be brought back at the same time that taxes on corporate profits are cut.
  • Second, India is finally seeing more household savings going into financial assets, led by the spread of domestic mutual funds. This shift in savings behaviour should not be blocked.
  • Third, the rate at which LTCG is taxed should be lower than the rate at which incomes are taxed, going by the efficiency concerns mentioned at the beginning of this editorial.
  • Fourth, the finance minister should announce a clear time frame for the reintroduction of LTCG taxation so that there are no sudden shocks to the financial markets.
  • Fifth, the LTCG tax makes sense only if the tax on dividends is also brought back, else investors will demand higher dividends rather than retained earnings) while the regressive securities transactions tax must go.

What is a ‘Long-Term Capital Gain or Loss’

A long-term capital gain or loss is a gain or loss from a qualifying investment owned for longer than 12 months before it was sold. The amount of an asset sale that counts toward a capital gain or loss is the difference between the sale value and the purchase value, or simply, the amount of money the investor gained or lost when he sold the asset.


Difference Between Long and Short-Term Capital Losses

Like short-term capital gains, short-term losses arise from assets that have been owned for less than a year. However, short-term losses are treated just like long-term losses, from a tax perspective, and tax filers can claim short-term capital losses against their long-term capital gains. An investor who has long-term gains and losses and short-term gains and losses, will have to net the long-term gains and losses against each other, and do the same for the short term gains and losses. Then the net long-term gain or loss is netted against the net short-term gain or loss.


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