Date: 2nd Feb, 2018
Taxation on Indian Equities
There are Tax rates in place for LTCG (Long Term Capital Gain) and STCG (Short Term). A long-term capital gain is a gain from selling a share held for longer than 1 year. Gains are aggregated across all an investor’s LTCG transactions for the FY. So far, LTCG was zero tax in India, while STCG rate was 15%.
The LTCG Tax proposals in the Union Budget for FY18-19?
In Budget 2018, the Govt. has proposed a 10% LTCG tax for equity and equity MFs with 2 conditions:
- The LTCG tax of 10% would be levied only on the LTCG in excess of Rs 1 lakh in one fiscal.
- The gains up to 31st Jan, 2018 will be grandfathered. This will protect our LTCG gains so far.
Let us understand this with an example the FM used while presenting the budget. If an equity share is purchased 6 months before 31st Jan 2018 at Rs. 100/- and the share price trades at Rs. 120/- on 31st Jan 2018 than in respect of this, there will be no tax on the gain of Rs. 20/- if this share is sold after 1 year from the date of purchase. However, any gain in excess of Rs. 20 earned after 31st Jan 2018 will be taxed at 10% if this share is sold after 31st July, 2018. To put it simply,
- Any LTCG accrued until 31st Jan 2018 wouldn’t be taxed.
- Any incremental LTCG above this would then be taxed at 10% (If you hold it at least for 1 year)
- If you sold in less than 1 year, the existing 15% STCG would be applicable as earlier.
Background to LTCG and impact for investors?
It was in 2004 that tax on LTCG was removed and Securities Transaction Tax (STT) was introduced. STT levies a small tax on every transaction – buy or sale, done through stock exchanges. For FY18 the govt. may earn Rs. 7,769 cr. of revenue from STT. So now we see both STT and (LTCG – STCG) taxes in place. As per projections, the govt. may collect Rs. 20,000 cr. through LTCG tax.
- If your portfolio gains have been 20% for LTCG so far, we can estimate that this may fall to 18% incrementally for fresh investments. Investors should continue to make Buy and Sell decisions based on portfolio growth objectives.
- Investors can Set Off the LTCG against any Long Term Capital Losses in the year for Tax planning.
- For investors with a direct equity and Equity MF portfolio of less than Rs 10 lakhs, they may like to plan the sales so that the ‘less than 1 Lakh LTCG rule’ applies for that financial year.
- Where the portfolio is larger, this additional tax will be inevitable.
So what might be the market mood now?
- The grandfathering concept will protect the Investors for past LTCG gains.
- Equity as an asset class has been enjoying good returns for the last few years. We feel it will continue to outperform other asset classes like gold, real estate, FDs etc.
- Investors need to bake in the LTCG tax impact. The markets may see a small correction or negativity for a few days before recovering.
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