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Budget 2022: Time for uniform tax on debt and equity investment

Manoj Purohit, Partner - Tax and Regulatory Services
Leader - Financial Services
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13 January 2022

The upcoming Budget might make the finance minister walk a tightrope, given the issues grappling the economy amid the threat of a third Covid wave becoming devastating. The financial services sector plays a pivotal role in contributing to the growth of the country. To continue the momentum and pace of revival, positive signals are required by way of measures that remove anomalies in the interpretation of tax laws, parity on tax treatments, etc., to further boost investor sentiments and help India bounce back faster.

One such issue that requires immediate attention is the disparity in tax treatment of financial assets.

The taxability of such assets is based on whether they qualify as long term or short term, which is based on the period of holding. The tax rate is different for short-term and long-term assets depending on the type of capital assets and payment of applicable securities transaction tax. To qualify as a long-term capital asset in the case of a share listed on a recognised stock exchange in India, the holding period is 12 months. It is 24 months in the case of an unlisted share. The holding period in the case of a debenture listed on a recognised stock exchange in India is 12 months. It is 36 months for unlisted debentures. In the case of an equity-oriented mutual fund unit, the holding period is 12 months; it is 36 months for a debt-oriented mutual fund unit. The tax rates on long-term and short-term capital gains are accordingly determined in the range of 10%-30% (plus surcharge and cess as applicable) depending on the nature of financial assets and the period of holding.

To explain this by way of an example, say if one invests in a listed debenture, the holding period to qualify as long term is 12 months, whereas in the case of a debt-oriented mutual fund unit, it is 36 months in order to be taxed as long-term capital gains.

To reduce the complexity and create a level playing field among equity and debt, it is the industry’s request that the minister consider the proposal of a uniform period of holding for all classes of financial assets. Similarly, the rationalisation of tax rates on such gains will give impetus for investments in the debt segment. It is, thus, a logical and a fair ask to amend the law for considering all types of financial assets as long-term capital assets after 12 months of holding. Similarly, for financial assets, a single tax rate for long-term and short-term capital gain should be introduced, irrespective of the nature of investments, whether equity or debt; listed or not.

Statistics have shown significant growth in systematic investment plans. Further, the number of demat accounts opened in the first nine months of this financial year has increased substantially. In the light of the growing volume and interest of investors in the financial assets space, especially the debt segment, it’s the right time to make this sector more lucrative by bringing in the aforesaid amendments in tax laws. A simple capital gains tax regime will not only ease compliances, but also harmonise the differential tax treatment between equity and debt.

Source :- https://economictimes.indiatimes.com/markets/stocks/news/budget-2022-time-for-uniform-tax-on-debt-and-equity-investment/articleshow/88872904.cms