Saturday, 17 February, 2018

Budget 2018: Arun Jaitley proposes 10% LTCG for gains over 1 lakh

India's Finance Minister Arun Jaitley holds his briefcase as he arrives at the parliament to present the federal budget in New Delhi India Budget 2018: Sensex jumps above 36000, Nifty crosses 11000
Nellie Chapman | 03 February, 2018, 04:01

The Centre proposed to remove short-term and long-term capital gains tax on non-resident investments coming through IFSC.

But is it fair to make equity funds taxable when it was made tax-free (abolition of long-term capital gains taxes) so many years ago (2004, to be precise)?

The securities transaction tax (STT) of 0.001%, which unitholders of mutual funds pay at the time of selling and the STT paid at the time of buying and selling of direct equity shares (0.1% paid both at the time of buying as well as selling) will continue to be paid. In what is a fair move, the 10% LTCG tax is applicable on an incremental basis and all holdings as on January 31, 2018 would be grandfathered and valued at prices on that day.

If one holds shares for more than one year, he will be taxed at 10 per cent, if the gains exceed Rs 1 lakh.

Will people who are already invested be taxed?

In the run-up to the Budget, there were fears that the market could slide sharply if the LTCG tax was introduced.

Investors have taken advantage of this exemption, tapping Indian markets to whole new level presently.

According to the data showed by Association of Mutual Funds in India, the MFs asset under management (AUM) which stood at mere Rs 10 lakh crore in mid-2014 - jumped to Rs 21.27 lakh by end of December 2017.

As expected, when the government announced the comeback of Long Term Capital Gain Tax, the market reacted negatively, but the market bounced back due to the grandfathering provision that the finance minister added to it. The budget proposed to levy 10 per cent LTCG on profits of more than Rs 1 lakh on shares and other equity-oriented investments like units of mutual funds. In other words, while the new tax will be applicable to all investments, the reference price would be the highest quoted price on January 31, 2018, or the cost of acquisition, whichever is higher. The issue of tax evasion through stock exchanges by paying a small STT component instead of LTCG tax has been raised regularly by market participants.

Mr A had purchased 1,000 shares of XYZ Limited at Rs 250 per share in January 2015.

Introduction of 10% Dividend Distribution tax (DDT) on dividend options of equity funds is seen as impacting flows into funds where investors were primarily entering with the expectation of regular dividends. The budget has also kept the STT rates unchanged in spite of the introduction of LTCG. Indexation had resulted in reducing the quantum of the capital gains.

Abhinav Gupta, VP, Capital Market, Share India Securities Ltd, said, "The tax would impact sentiment in negative effect which would be completely priced in over the course of next few days".