Budget 2018: Listed Equity Shares, LTCG

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Biggest announcement for investors in Union Budget 2018

Long Term Capital Gains on transfer of Listed equity shares [Section 10(38)] will be taxed at 10 percent on the profits gained over  Rs 100,000.

Finance Minister Arun Jaitley  said that the returns from the stock market are attracting and it was the time to bring them under the ambit of capital gains tax. The minister said, “I propose only a modest change in the present regime. I propose to tax such long term capital gains exceeding Rs 1 lakh at the rate of 10 percent without allowing benefit of any indexation.”

Re-introduction of Long Term Capital Gain Tax on Transfer of listed equity shares

Arun Jaitley in his Budget 2018 speech has proposed to re-introduce long-term capital gains tax. Gains arising from the transfer of listed equity shares exceeding Rs 1 Lakh will be taxed at 10 percent. Also no indexation benefit will be allowed. Section 112A has also been introduced.  This concessional rate will be applicable if long term capital asset is in the nature of equity share. Also security Transaction Tax has been Paid on acquisition and transfer of such capital asset. The short term capital gain will remain unchanged at tax rate of 15%.

New provision of Section 112A proposes to provide the following-
  •  Without giving effect to 1st and 2nd provisos of section 48 LTCG will be computed.
  • Cost of acquisition of long term capital asset acquired after 1/2/2018 shall be higher of-

                   a) the actual cost of acquisition of such asset

                   b)the lower of-

                                1)  FMV of such asset and

                                2)  full value of consideration received as a result of transfer of capital asset.

FM also said that all gains up to January 31, 2018 from sale of equity will be grandfathered. Earlier, gains from sale of equity after one year were exempt from capital gains tax. Introduction of STT made long term capital gains tax exempt in Budget 2004.  To wean away money flowing into unproductive assets like gold and to attract more money in capital market, LTCG exemption was brought in as an incentive.

He further introduced Long Term capital gains Tax on listed securities on gains of over 1 Lakh. Most of the analysts were factoring on a change in definition of LONG TERM to 2-3 years from 1 year.

Explaining further Jaitley said:

An equity share is purchased six months before 31st January, 2018 at Rs 100/- and the highest price quoted on that date of this share is Rs 120/-. Hence there will be no tax on the gain of Rs 20/-. This will be allowed only if share is sold after one year from the date of purchase. However, any gain in excess of Rs 20 earned after January 31, 2018 will be taxed at 10% if this share is sold after July 31, 2018.

 Tax on Distributed Income

Investors will have to pay 10% tax on distributed income from equity oriented mutual funds, as per the budget 2018.

The overall investor sentiment will be hit after the introduction of new tax regime. This is because mutual funds have recently emerged as a key route to invest in stock markets, experts said.

Sentiments may get impacted (with the introduction of long-term capital gain tax) as mutual funds have been gaining traction among investors as route to invest in stock markets,” HDFC AMC Chairman Deepak Parkeh said.

Conclusion

The traders and Investors had already been factoring on additional tax burden. Hence, the decision taken by Finance Minister in this regard is not a negative surprise. Besides, the Government has protected gains made before 31st January 2018.  It has also said that the gains made only above Rs 1 Lakh will be taxable. If we look at the positive site of LTCG tax regime, it will avoid irrational exuberance in the market due to high capital flows.

However, the new LTCG regime is negative for equities market. A large number of investors will now need to factor on additional 10% of tax burden on new equity investments.

If we look at the positive site of LTCG tax regime, it will avoid irrational exuberance in the market due to high capital flows.

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