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The change
For shares and units in equity-oriented mutual funds sold after one year of holding, a long-term capital gains (LTCG) tax will now be chargeable at 10 per cent on gains over ₹1 lakh. To bring parity between those opting for growth and dividend options in equity funds, dividends from equity-oriented mutual funds will also be taxed at 10 per cent. These new rules will apply for LTCG made from April 1, 2018.
The gains till the date of announcement of this change will be left out of the tax net. As per the Finance Minister’s example, if an equity share is purchased on July 31, 2017 at ₹100 and the highest price quoted on January 31, 2018 for the same is ₹120, there will be no tax on the ₹20 so far gained if this share is sold after one year from the date of purchase (since the announcement has been made only on February 1, 2018). Any gain in excess of ₹20 earned after January 31, 2018 will be taxed at 10 per cent if this share is sold after July 31, 2018. The gains from equity shares/funds held up to one year will remain short-term capital gain and will continue to be taxed at the rate of 15 per cent.
The background
With the market on a purple patch and the Government too looking for additional revenues to balance the fisc, the LTCG tax on equities is not a total surprise.
Equities have enjoyed pride of place among asset classes with capital gains on holdings over one year being considered long-term and enjoying tax-free status. The move to remove this cult status has not come overnight. The Direct Taxes Code, introduced by the UPA government, first mooted this proposal. A revised version of the Code (which lapsed with the dissolution of the UPA government in 2014), suggested an LTCG tax on equities but provided 100 per cent and 50 per cent deduction respectively for long- and short-term gains respectively, effectively making LTCG tax-free again.
The verdict
Every cloud has a silver lining. The good news is that this tax is not applicable retrospectively. Second, small investors need not fret so much as only gains over ₹1 lakh will be taxed. Going by the Budget speech, this move is targeted at corporates. According to the Finance Minister, tax-free LTCG on equities has created a bias against manufacturing, leading to more business surpluses being invested in financial assets.
Third, unlike Securities Transaction Tax which is paid by an investor irrespective of whether you have made profits or not, LTCG tax will be paid only on gains. Also, LTCG tax can help long-term investors set off their losses in one year when the markets are bearish against gains in another year.
Takeaways
Tax on long-term gains in stocks and equity funds
Small investors not hurt much
Setting off long-term loss against long-term gains will now be possible
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