Raising the LTCG Tax Limit, Expanding Benefits for First-Time Homebuyers: What Retail Investors Want from Budget 2022

NEW DELHI: As every year before the presentation of the Union budget, this time too investors are hoping that the government can raise the limit on Long Term Capital Gains (LTCG), helping them benefit from the gains on the financial markets.
An online survey conducted by The Times of India (TOI) and professional services firm Deloitte showed that nearly 90% of respondents want the government to increase the annual tax exemption limit by Rs 1 lakh for LTCG.
The tax is levied on gains exceeding Rs 1 lakh on the sale of shares held for a period of one year from the date of purchase.

It was abolished in 2005 and reinstated in the 2018 budget, given the dynamism of the capital markets.
While earnings above Rs 1 lakh are taxed at 10%, for people in the highest income bracket it is 14.25% – including tax and surcharge.

“The LTCG tax was announced by the government in 2018, in view of the vibrant capital markets and the significant gains generated, especially by businesses and limited liability companies. The perception was that there was a significant bias in favor of diversion of investments to capital markets and financial assets versus investments in manufacturing and real estate assets etc. The aim was also to curb the erosion of the tax base and prevent the use of the tax arbitrage opportunities created as a result of the LTCG exemption,” said Saraswathi Kasturangan, Partner at Deloitte.
Thus, any decision on LTCG taxation is likely to have a direct impact on equity markets.
“The government may consider increasing the limit of LTCG on the sale of listed shares and units of equity-oriented mutual funds, which is currently set at Rs 1 lakh per fiscal year. this exemption threshold will encourage taxpayers to invest in market capital,” Kasturangan added.
In fact, tax policy also forms a large part of an individual’s decision-making process. Seventy-two percent of survey respondents agreed that the tax structure has a big influence on their choice of investment vehicle.

Tax structure for different investment options
Any profit from fixed assets like stocks, mutual funds, gold, real estate is a capital gain and subject to tax depending on the type of investment.
For listed shares held for less than 12 months and sold for profit, it is a short-term capital gain (STCG) and is subject to a 15% tax.

Any profit from fixed assets like stocks, mutual funds, gold, real estate is a capital gain and subject to tax depending on the type of investment.
The TOI-Deloitte survey found that 79.1% of respondents said the existing tax structure was very complex and similar asset classes were taxed differently.

For listed shares held for less than 12 months and sold for profit, it is a short-term capital gain (STCG) and is subject to a 15% tax.
While capital gains from shares held for more than 12 months are long-term capital gains and are subject to a 10% tax. This 10% is calculated after an exemption of up to Rs 1 lakh on overall winnings.
In the case of a real estate investment trust (REIT) — which pools the capital of many investors and helps individual investors earn dividends on real estate investments without having to buy, manage or finance a property — the long-term asset holding is 3 years or more.
For mutual funds other than equity-oriented mutual funds, there is a 20% tax (with indexation) on long-term gains for a holding period of 36 months.

Meanwhile, ULIP taxation was introduced in last year’s budget. This would act as a level playing field between equity-oriented mutual funds and ULIP from a tax perspective.
In the same vein, the threshold for considering REIT shares listed as long-term should be raised to 12 months from 36 months.

Extend tax benefits for first-time buyers
In the 2019 Union Budget, the government had introduced Section 80EEA to provide a tax incentive to homebuyers under the Affordable Housing Scheme.
In accordance with the provisions of this section, a first-time home buyer was offered an additional deduction of Rs 1.50 lakh per annum on the interest payment of the home loan, only if the loan was sanctioned between 1 April 2019 and March 31, 2020. This date was later extended to March 31, 2022.
This deduction was allowed in addition to the deduction of up to Rs 2 lakh offered under Section 24, for a home loan taken out for a self-contained property.
The provision of Section 80EEA also came with many other conditions.

First, the loan must be sanctioned by a bank, banking company or housing finance company between the mentioned period. The stamp duty value of the property must not exceed Rs 45 lakh and the buyer must not own any other residential property on the date of loan sanction.
The real estate sector has suffered a major setback due to the pandemic. Strict lockdowns in major cities have impacted sales as home registrations have also been suspended and loan disbursements have been slow.
In the TOI-Deloitte survey, 57% of respondents agreed that real estate needed more support. Nearly 25% of them believe that the granting of tax advantages is not the only factor that will help the sector.

“As there is a large population that needs help in accessing home ownership, it is expected that the time frame will again be extended for such loans to be sanctioned. Revisited and the limit can be further improved” , Kasturangan said.
Increase Section 80C limit to boost investment in PPF, NSC
Small savings schemes such as the Public Provident Fund (PPF), the National Savings Certificate (CSN) have long been good investment instruments.
However, the low interest rates offered by these plans have made them a little less appealing, especially to the millennial crowd who are looking for faster ways to earn money with higher returns.
About 57% of respondents in the TOI-Deloitte survey said these programs had lost their luster and become unattractive.

A recent trend that has been noticed is that retail investors have opted to invest in stocks or mutual funds as markets hit record highs. About 31.4% of respondents said young investors choose stocks or mutual funds as an investment option.
This trend has been observed even though schemes like the PPF and the NSC fall under the EEE (exempt-exempt-exempt) category and receive favorable tax treatment compared to other fixed pension contributions such as the foresight and the NPS.
However, 36.3% of respondents said opting for NPS only for additional tax savings of Rs 50,000. While 31.9% said mutual funds, ULIPs and annuity products would insurance were better options.
Contributions to both the PPF and the NSC are eligible for deduction under Section 80C within the aggregate limit of Rs 1,50,000. Interest in the PPF account is tax-exempt for all years and interest accrued on NSC is eligible for deduction up to the aggregate limit of Section 80C, except for the final year in which the interest is not reinvested.
Therefore, increasing the Section 80C limit will give taxpayers additional means to invest in such plans, Deloitte believes.
Consider the table below to find out how much return an investment of Rs 1 lakh made 5 years ago would have yielded today.

Increase the $250,000 limit for investments under a liberalized cash transfer program
According to the Liberalized Remittances Transfer Scheme of the Reserve Bank of India (RBI), all residents including minors are allowed to freely transfer up to $2,50,000 per fiscal year for any authorized current account transaction or capital or a combination of both.
The survey received mixed responses on this. The majority (52%) of respondents said that the current limit has not been revised for some time now and that the government could consider it in order to encourage global investment. While 48% felt the program was good enough to invest overseas.

The scheme was introduced on February 4, 2004, with a limit of $250,000. The limit was revised in stages in accordance with prevailing macro and microeconomic conditions. It was last increased in 2015.
Deloitte believes the government may consider raising the limit in this year’s budget.

Comments are closed.