How capital gains on equities are taxed around the world

But, over the years, there have been growing concerns, not only in India but also in many other countries, that taxing capital gains could become a strong disincentive for people to invest, and this could further inhibit economic growth. .

It is in this context that capital gains generally receive preferential tax treatment in many countries compared to any other income. For example, in India, long-term capital gains on various assets are generally taxed at 10-20%, while the highest income tax rate applicable to regular income is 30%. Similarly, in the US, capital gains are taxed at 0-20%, while the top tax rate for ordinary income for individual taxpayers is 37%.

A working paper published in January by the International Monetary Fund (IMF) shows that special rates are the dominant form of taxing capital gains in countries. “Indeed, 57%, 41% and 60% of countries in advanced economies, emerging markets and low-income developing countries, respectively, use a special rate to tax capital gains..” according to the paper titled ‘Progress of personal income tax’ ‘In emerging and developing countries’.

In addition, many countries exempt taxes on capital gains up to a certain limit, which is otherwise not available for ordinary income. For example, in the case of long-term capital gains (LTCG) on listed shares, India exempts 1 lakh per annum of the capital gains earned. Similarly, in the US, LTCG on stocks up to $44,625 is taxed at zero rate. The exemption limit in both countries is about 0.6 times the per capita income in 2021. To give perspective, in 1950, the exemption limit as a multiplier of per capita income was 57 times in India. This shows that the exemption limit (compared to income levels) has narrowed significantly over the years.

“When you take a deep dive and look at the laws in different countries, the CGT regime actually becomes very complex. Calculation of capital gains, holding periods, loss offsetting provisions, tax rates, surcharges etc. on different asset classes There are different rules for different countries, I think India is not an exception to this system. said Rajesh Gandhi, partner at Deloitte.

Having said that, a cross-country comparison of LTCG taxation and dividends from listed equities reveals that the tax structure in India is simpler than most countries, if not the most beneficial for the taxpayer.

In this story, we look at the LTCG tax regime for equity in various countries like India, USA, Canada, UK, Australia, China, Japan, UAE and Singapore and how India ranks on this basis. The analysis is based on data from each country’s official tax websites, information on PwC’s (PricewaterhouseCoopers) ‘Worldwide Tax Summary’ and inputs from Deloitte.

present situation

Among the countries listed above, capital gains are completely exempt from tax in Singapore and the United Arab Emirates. The UAE imposes no income tax on individuals, let alone capital gains, making it one of the few countries that treats income tax-free, the kind of tax system everywhere one could wish for. Is.

Above this, India taxes LTCG on listed equity at a flat rate of 10%. 1 lakh per annum. Japan and China also tax capital gains at the same rate of 20.315% and 20% respectively, but without any exemptions and without the distinction between LTCG and short-term capital gains (STCG).

Due to no exemption of any kind on capital gains, individuals of these two countries have to pay a higher tax amount on capital gains as compared to their counterparts in other countries. (see table),

High-income countries – the US and the UK – do not have a flat rate tax system, but follow a different slab structure (smaller) than regular income. In the US, capital gains of up to $44,625 are exempt from tax, while the UK allows a deduction of up to £12,300 per year from capital gains.

While the amount of exemption/deduction varies greatly between India, the US and the UK, the range is around 0.4 – 0.6 times the per capita income in the respective countries for taxpayers when it comes to taxing capital gains on shares. An equal opportunity arises.

taxed as regular income

Canada and Australia—two other high-income countries—treat capital gains like any other ordinary income and tax them at personal slab rates.

Having said that, both the countries allow a 50% deduction from the capital gains amount.

While this may seem like a huge advantage for taxpayers here, the high income tax rates in these countries keep tax rates on capital gains higher than in Australia, India and most other countries in particular.

dividend taxation

In case of dividends also, India follows simple taxation system. Dividend is fully taxed in the hands of the shareholders at the applicable slab rate of the individual. Of course, this is not comparable with the UAE and Singapore, where dividend income for individuals is also exempt.

Canada and Australia require individuals to aggregate dividend income received. In simple terms, it means raising the dividend income received before taxes to their value, which would have been paid by the company distributing the dividend. Grossed-up dividends must be added to a person’s ordinary income, from which a certain amount of ‘dividend credit’ can be deducted. The net income is taxed at the respective slab rates of the individual.