History of Capital Gains Tax on Listed Equity in India
The taxation of capital gains on listed equity in India has evolved significantly since its inception, reflecting the country’s economic and regulatory changes. Here's a brief yet comprehensive look at how capital gains tax has developed over the years.
How It Started
In the early years post-independence, India did not tax capital gains. This changed in the late 1940s.
• 1947: Introduction of capital gains tax. Gains up to ₹15,000 were exempt. For amounts between ₹15,000 and ₹50,000, the tax rate was 6.3%, and it rose progressively, reaching 31.3% for gains over ₹10 lakh.
• 1956: T.T. Krishnamachari made capital gains tax a permanent feature with some modifications.
Key Milestones in Capital Gains Taxation
• 1992: Finance Minister Manmohan Singh introduced indexation benefits for long-term capital gains (LTCG) and a special tax rate of 20% for LTCG.
• 1997: Yashwant Sinha reintroduced taxing dividends in the hands of shareholders.
• 2003: Under Jaswant Singh, LTCG was taxed at 20% with indexation or 10% without. Short-term capital gains (STCG) were taxed at slab rates, while dividends remained exempt for shareholders.
• 2004: P. Chidambaram exempted LTCG and introduced the Securities Transaction Tax (STT), taxing STCG at a flat rate of 10%.
• 2008: The STCG tax rate was increased to 15%, while LTCG remained exempt.
Recent Developments
• 2016: Arun Jaitley abolished the dividend tax in the hands of shareholders and introduced the Dividend Distribution Tax (DDT).
• 2018: Jaitley reintroduced LTCG tax on equity, taxing gains above ₹1 lakh at 10%. STCG was taxed at 15%, and dividends exceeding ₹10 lakh per annum were taxed at 10%.
• 2020: Nirmala Sitharaman made dividends taxable in the hands of shareholders at the applicable slab rate.
Comparative Analysis: Then and Now
The journey of capital gains tax reflects the changes in India’s economic policies and the growing complexity of its tax system. For instance, in 1950-51, the per-capita income was ₹265. Today, it is around ₹1.5 lakh. The exemption limit, which was 57 times the per-capita income then, would translate to ₹85.5 lakh today, showing the substantial increase in economic standards and tax thresholds.
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