Raise tax limit on LTCG, extend benefits for first time homebuyers: What retail investors want from budget 2022

NEW DELHI: Like every year before the presentation of the Union Budget, this time too investors are hoping that the government may increase the limit on long-term capital gains (LTCG), helping them to benefit from gains in the financial markets.
An online survey conducted by The Times of India (TOI) and professional services firm Deloitte showed that nearly 90 per cent of the respondents want the government to hike the annual tax exemption limit of Rs 1 lakh for LTCG.
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The tax is levied on gains over and above Rs 1 lakh on sale of equities that have been held for a period of one year from date of purchase.

It was abolished in 2005 and brought back in the 2018 budget, given the buoyancy of the capital markets.
While gains above Rs 1 lakh are taxed at 10 per cent, for individuals in the highest bracket of earnings it comes to 14.25 per cent - inclusive of cess and surcharge.

"LTCG tax was announced by the government in 2018, considering the buoyant capital markets, and the significant gains that were being generated, especially by corporates and LLPs. The perception was that there was a significant bias towards diversion of investments to capital markets and financial assets as compared to investments in manufacturing and real assets etc. The objective was also to curb the erosion in the tax base and prevent the use of tax arbitrage opportunities created on account of exemption of LTCG," said Saraswathi Kasturirangan, partner at Deloitte.
So, any decision on LTCG taxation is likely to have a direct impact on the equity markets.
"The government could consider increasing the limit of LTCG on sale of listed equity shares and units of equity-oriented mutual funds which is currently pegged at Rs 1 lakh per financial year. Enhancement of this exemption threshold will encourage taxpayers to make investment in the capital market," Kasturirangan added.
In fact, taxation policy forms a big part of an individual's decision making process as well. Seventy-two per cent of the respondents in the survey agreed that tax structure is a big influence over their choice of investment instrument.

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

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

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

Meanwhile, the taxation of ULIPs was introduced during last year's budget. This would act as a level playing field between equity oriented mutual funds and ULIP from a taxation perspective.
On similar lines, the threshold to consider units of listed REITs as long term should be changed to 12 months as against 36 months.

Extend tax benefits for first-time home buyers
In Union Budget 2019, the government had introduced section 80EEA to provide a tax incentive for homebuyers under the affordable housing scheme.
As per the provisions of this section, a first-time home buyer was offered an additional deduction of Rs 1.50 lakh per year on the home loan interest payment, only if the loan was sanctioned between April 1, 2019 and March 31, 2020. This date was later extended to March 31, 2022.
This deduction was allowed over and above the deduction of up to Rs 2 lakh that is offered under section 24 , towards a home loan taken for self-occupied property.
The provision of section 80EEA was laden with many other conditions as well.

Firstly, the loan should be sanctioned by a bank, banking company or housing finance company between the period as mentioned. The stamp duty value of property should not exceed Rs 45 lakh and homebuyer should not own any other residential property on the date of sanction of loan.
Real estate sector suffered a major setback because of the pandemic. Stringent lockdowns across major cities had impacted sales as home registrations were also suspended and loan disbursals were slow.
In the TOI-Deloitte survey, 57 per cent of the respondents agreed that real estate needs more support. Nearly 25 per cent of them felt that providing tax benefits is not the only factor that will help the sector.

"As there is a large population which needs support for home ownership, it is expected that the timeline will again be extended for such loans sanctioned. Further, the existing condition of having stamp duty value of residential house property not exceeding Rs 45 lakhs may be revisited and limit may be further enhanced," Kasturirangan said.
Increase section 80C limit to spur investment in PPF, NSC
Small saving schemes like public provident fund (PPF), national savings certificate (NSC) have been good investment instruments since long.
However, the low interest rates offered by these schemes have made them somewhat less attractive, especially to the millennial crowd who look for quicker avenues to earn money with higher returns.
About 57 per cent of the respondents in the TOI-Deloitte survey said that these schemes have lost their shine and become unattractive.

A recent trend that has been noticed is that retail investors have opted to invest in stocks or mutual funds, with markets soaring to record highs. Around 31.4 per cent of the respondents said that young investors are choosing equities or mutual funds as an investment option.
This trend has been observed even though schemes like PPF and NSC fall in EEE (exempt-exempt-exempt) category and have beneficial tax treatment compared with other fixed retiral contributions such as provident fund and NPS.
However, 36.3 per cent of the respondents said that they opt for NPS only for additional tax saving of Rs 50,000. While, 31.9 per cent said that mutual funds, ULIPs and insurance annuity products were better options.
Contributions towards both PPF and NSC are eligible for deduction under section 80C within the overall limit of Rs 1,50,000. Interest from PPF account is exempt from tax for all the years and interest accrued on NSC is eligible for deduction under overall limit of section 80C except for the last year when interest is not re-invested.
Hence, increasing the limit of section 80C will give extra avenues to taxpayers to invest in such schemes, feels Deloitte.
Consider the table below to know how much return an investment of Rs 1 lakh made 5 years back would have fetched today.

Hike $2,50,000 limit for investment under liberalised remittance scheme
According to the Reserve Bank of India's (RBI) liberalised remittance scheme, all resident individuals, including minors, are allowed to freely remit up to $2,50,000 per financial year for any permissible current or capital account transaction or a combination of both.
The survey received mixed responses on this. Majority (52 per cent) of the respondents said that the current limit has not been revised for a while now and the government may think upon it in order to encourage global investments. Whereas, 48 per cent felt that the scheme is good enough for investment abroad.

The scheme was introduced on February 4, 2004, with a limit of $2,50,000. The limit has been revised in stages consistent with prevailing macro and micro economic conditions. It was last increased in 2015.
Deloitte feels that the government may consider increasing the limit in this year's budget.
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