New Delhi : In what is being billed as a make or break Budget to revive the economy, the Modi government is likely to introduce heavy duty measures for rationalisation of key equity taxes, including scrapping capital gains on sale of property, shifting tax applicability of dividend distribution tax (DDT) to the receiver and extending the timeline of long-term capital capital gains (LTCG) tax from the current 12 months to 24 months.
The breakthrough measure, if it materialises, will be doing away with capital gains on sale of property. The move has the potential to revive the real estate sector, which is in the doldrums and facing immense stress.
The government is considering a proposal to do away with capital gains on selling property. Currently, one has to pay 30 per cent capital gains on the sale of a property, if the amount is not re-invested in property within 3 years.
If property is sold within 24 months, one has to pay a short-term capital gains tax (STCG) on the gains as per an individual’s income-tax slab.
After 24 months, one has to pay an LTCG tax, which is charged at 20 per cent with indexation benefits. Section 54 gives an exemption if there is sale of a property and then another one is bought.
This exemption is available when the capital gains from property sale are reinvested into buying or constructing maximum two houses.
However, the capital gains on the sale of house property must not exceed Rs 2 crore in order to claim exemption for re-investing in two properties. This benefit can be claimed only once in the lifetime.
The exemption will be reversed if this new property is sold within three years of purchase and capital gains from sale of the new property will be taxed as short-term capital gains. The new properties must be purchased either one year before the sale or two years after the sale of the property. Alternatively, the new residential properties must be constructed within three years of sale of the property.
In addition, the government is likely to change the applicability of dividend distribution tax (DDT) by shifting the tax liability from dividend issuer or the company to the receiver.
Currently, dividend distribution tax is levied at an effective rate of 20.56 per cent on the company declaring dividends. This is over and above the corporate tax. Apart from this, resident non-corporate taxpayers need to pay 10 per cent tax on dividends in excess of Rs 10 lakh a year. The DDT was introduced for more efficient collection of dividend tax from the companies rather than shareholders.
In a move that will fire up the stock markets, the government is likely to extend the timeline of long term capital gains on shares from the current 12 months to 24 months.
Currently, LTCG of 20 per cent is paid by domestic investors if they hold equity for 12 months, and 10 per cent is charged to non-residents if they hold equity for the same period.
