The Finance Minister's announcement on long-term capital gains on investments has come in as a surprise to the investing community.
“I propose to tax such long-term capital gains exceeding Rs 1 lakh at the rate of 10 per cent without allowing the benefit of any indexation. However, all gains up to January 31, 2018 will be grandfathered,” he said.
Grandfathered concept exempts someone or something from a new law or legislation. The cut of date for gains up to January 31, 2018 comes to the rescue of investors.
According to Pranav Jain, Partner, MDP & Partners (Law firm) as of yesterday, profits from stock investments held for more than 12 months were tax exempt. Earlier one had to only pay securities transaction tax or STT, now it is coupled with LTCG.
Best thing is that all profit earned up till January 31, 2018 are exempted from the newly introduced LTCG. So this is a 'grandfathering' concept, not giving a retrospective effect and only marginal gains year on year henceforth will be taxed.
This is not a welcome move from the point of view of the investors who actually invested in the equity market with an intent of savings, growth or diversification.
Trading investors are already paying STCG of about 15 per cent, this may not impact such intra-day or short term traders.
Investment in stocks is considered as a risky asset in an investment portfolio. To inculcate the habit of investing in people for a long horizon, LTCG was zero per cent earlier.
Now the difference is not much when STCG compared with LTCG, being 15 per cent and 10 per cent, respectively. Considering a conservative inflation rate of 6 per cent, the price value of money will not permit the investor to hold on to a security for a period of 12 months to take advantage of LTCG at 10 per cent.
Another issue, is the way this change is being looked at, he says. “While it will impact only marginal gains earned post-January 31, 2018, however, any investments made today and gains made there on will be taxed at 10 per cent. This is without indexation which is not permitted. This per cent has to reduce over the years – as in the long run we have to factor the inflation and price value, this impact is huge on the investments,” he says.
“People may go on for other investment avenues, our bet is on gold now,” he says.