Longer holding period, lower LTCG: Could government reward patient equity investors?

A decision to restructure long-term capital gains (LTCG) tax on equities, held by both foreign and domestic investors, may be taken in the coming weeks and before the Budget, sources privy to the matter, including a government official, told Moneycontrol. This update comes after Finance Minister Nirmala Sitharaman on October 13 said the government would be keen to hear stakeholder views and debate around the long-term capital gains (LTCG) tax. For investors, the current tax treatment remains important when deciding when to sell shares, redeem equity mutual funds or exit exchange-traded funds (ETFs). Here is what you need to know about LTCG tax rates, exemptions and the costs that can affect your final returns. What are the current LTCG tax rates on equity investments? Under the current rules, listed equity shares, equity-oriented mutual funds and eligible domestic equity ETFs qualify for long-term capital gains treatment when held for more than 12 months. Long-term capital gains exceeding Rs 1.25 lakh in a financial year are taxed at 12.5 percent, excluding applicable cess and surcharge. Short-term capital gains on these eligible investments, sold within 12 months, are taxed at 20 percent. The government has not announced any changes to these rates yet. Any restructuring would depend on the proposals being examined and the final decision. Could a longer holding period mean lower taxes? The debate is not limited to reducing the tax rate. SBI Research has proposed scrapping LTCG tax on equities and increasing the qualifying holding period to two or three years to encourage long-term investments and attract more stable capital flows into Indian markets. Such a change could alter how investors plan their exits. If the government links tax benefits to a longer holding period, investors may have an incentive to stay invested for longer rather than sell once their shares cross the current 12-month threshold. However, a longer holding period would not automatically mean a lower tax bill unless the government introduces a specific concession. The existing 12-month threshold and tax rates continue to apply. How does India compare with other countries? What should retail investors do now? Investors should continue to plan sales and redemptions under the existing tax rules rather than make decisions based on a possible policy change. The Rs 1.25 lakh annual exemption applies to eligible long-term equity gains, while capital losses may be used to offset eligible gains, subject to set-off rules. The exemption is calculated for each financial year and does not automatically carry forward if unused. Investors should also account for securities transaction tax, brokerage, exit loads and other applicable costs when calculating their net returns. Any proposed LTCG restructuring could change the balance between tax savings and holding investments for longer. Until the government announces a decision, however, investors should not assume that staying invested beyond the current qualifying period will bring additional tax benefits. Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.