Budget 2023: Increased Capital Gains Tax and Abolition of Angel Tax Announced by Finance Minister

Finance Minister Nirmala Sitharaman's Budget 2023 introduced an increase in capital gains tax rates while abolishing the angel tax to support startups. Short-term gains on specified assets will be taxed at 20%, and long-term gains at 12.5%. Notably, the exemption for lower and middle-income classes has been raised.

In a move that may disappoint stock market investors, Finance Minister Nirmala Sitharaman announced an increase in both long-term and short-term capital gains taxes during her Budget speech on Tuesday. Capital gains arise from profits made on the sale of 'capital assets'.

Short-term capital gains on "specified" financial assets will now attract a 20% tax rate, up from 15%. Other financial and non-financial assets will continue to attract the applicable tax rates. Long-term gains on all types of assets will now be taxed at 12.5%, up from the previous 10%.

For lower and middle-income classes, the exemption limit for capital gains on certain listed financial assets has been increased from Rs 1 lakh to Rs 1.25 lakh per year. Listed financial assets must be held for more than a year to be classified as long-term, whereas unlisted financial assets and non-financial assets must be held for at least two years.

"Unlisted bonds and debentures, debt mutual funds, and market-linked debentures, regardless of the holding period, will be subject to tax on capital gains at applicable rates," Sitharaman added. All these changes come into immediate effect.

In a bid to support the startup ecosystem, Sitharaman proposed to abolish the angel tax for all classes of investors, a long-standing demand from the industry. The removal of this tax is expected to drive more investments towards startups, which are crucial for economic growth and job creation.

The abolition of the angel tax also received rare approval from the opposition. Former Finance Minister P Chidambaram expressed his satisfaction, noting that the Congress party had long advocated for this change. Angel tax is levied on the funding raised by unlisted companies that exceed their fair market value, a measure originally introduced to combat money laundering and bogus startups.

(With inputs from agencies.)