The Union Budget has introduced a 10% LTCG tax on gains made above Rs. 1 Lakh. Here’s what that means.
In line with expectations, the government has reintroduced the Long Term Capital Gains (LTCG) on equity investments. Capital Gains are the profit an investor generates on selling capital assets for a price higher than their purchase price. They are classified as Short-Term Capital Gains and Long-Term Capital Gains.
In India, the LTCG on stocks and equity Mutual Funds were tax-free for the last 14 years. But the short-term gains are taxed at 15 percent. The government has now introduced a 10% LTCG tax on gains made above Rs. 1 Lakh.
While introducing the tax, Finance Minister Arun Jaitley said, “With the reforms introduced by the Government and incentives given so far, the equity market has become buoyant. The total amount of exempted capital gains from listed shares and units is around Rs. 3,67,000 crores as per returns filed for A.Y.17-18. A major part of this gain has accrued to corporates and LLPs. This has also created a bias against manufacturing, leading to more business surpluses being invested in financial assets. The return on investment in equity is already quite attractive even without the tax exemption. There is, therefore, a strong case for bringing long-term capital gains from listed equities in the tax net.”
Here is all you need to know about the LTCG and how it will impact your investments in equities.
When Is The Tax Payable?
Since it is a Direct Tax proposal, it will be applicable for the Assessment Year FY19-20 (Financial Year FY18-19). In other words, the LTCG over Rs. 1 Lakh made for the year FY18-19 will be liable to tax at 10%.
Does it mean that there is no LTCG for Assessment Year FY18-19 (Financial Year FY17-18)?
One needs to understand the exact proposal in the fine print. However, it appears that any LTCG will not be applicable for FY18-19 on plain read. This question frankly needs a greater degree of expert study.
What is the relevance of the cut-off date of January 31, 2018?
The FM has proposed grandfathering of LTCG up to January 31, 2018. Any incremental LTCG after that will be counted as LTCG for the new tax. Grandfathering is defined as “exempting (someone or something) from a new law or regulation.”
What happens to my tax liability if I sell stocks starting today held for more than a year?
As for LTCG made in Financial Year 17-18 (i.e sale up to March 31, 2018), it appears there is no tax. However, any sale made after April 1, 2018, will be liable to the new LTCG tax. One needs to segregate this LTCG into two parts:
Part 1: LTCG made up to January 31, 2018. This will be the highest price of the stock on January 31, 2018, minus the cost of acquiring stock;
Part 2: LTCG made after January 31, 2018. This will be sale price minus the highest price of the stock on January 31, 2018.
While Part 1 will be exempt, Part 2 that will be assessed as LTCG (it can also be a capital loss) for tax, which will be computed at the rate of 10% (+ cess of 3%) only if exceeds Rs. 1 Lakh
What should be the strategy now on equity investments?
Any equity investor wishing to reduce the LTCG tax liability can sell stocks starting today till March 31, 2018, and incur zero tax provided the holding period is more than a year. However, one can continue to buy equity shares without any hesitation. Any future sales after March 31, 2018, have to be judiciously chosen to minimise the tax liability. Assuming equity investments yield a return of 15% every year, an investment of Rs 6.66 lakh each year will rise to Rs 7.66 lakh in a year and gains booked thereof will be tax-free. Even if the gains exceed 15% to, say, 25%, the LTCG tax will be Rs. 6,667 only.
Does this make equity investment unattractive?
Short answer: No. It doesn’t. The tax is not retrospective. The Indian markets continue to have great long-term prospects with projected economic growth pegged at 7-8% per annum. If you’re an investor looking for long-term returns, you should not pull out and remain invested. If you’re a Mutual Fund investor, you’re still using the best savings instrument there is and will continue to earn long-term returns better than most asset classes. The introduction of the LTCG should not change your long-term outlook.
The writer is General Counsel & Head of Compliance, BankBazaar