10% Tax on Long-term Capital Gains from Equity Shares and Mutual Funds

With Union Budget 2018, Hon'ble Finance Minister Arun Jaitley has sought to rationalize long-term capital gains (LTCG) from listed equity shares, units of quits of equity oriented mutual funds and units of business trust.

Present Scenario:

"With the reforms introduced by the government and incentives given so far, the equity market has become buoyant. The total amount of exempted capital gains from listed shares and units is around Rs. 3,67,000 crores as per returns filed for A.Y.17-18." said FM in the Budget speech.

Most Importantly, major part of this gain has accrued to corporates and LLPs.

In business terms, this means all surpluses and profits are being invested in financial assets such as equity shares and mutual. This might look a good benefit, but another side of the coin is that the same funds, if not invested, would have been used for manufacturing.

Thus, it has created a bias against for investment in manufacturing.

Proposed Change:

With Union Budget 2018, It is proposed to tax such long-term capital gains exceeding Rs. 1 lakh at the rate of 10% without allowing the benefit of any indexation.

However, all gains up to 31st January, 2018 will be grandfathered. In other words, long-terms capital gains made on investments up to January 31, 2018, will not be taxed.

Also, the existing short-term capital gains tax, applicable on profits made on investments below one year, remains the same at 15 percent.

The finance minister also introduced a 10 percent tax on distributed income by equity-oriented mutual funds at the rate of 10 percent. As this will create, a level playing field across growth-oriented funds and dividend distributing funds.

Practical Example:

If an equity share is purchased six months before 31st January, 2018 at Rs. 100 and the highest price quoted on 31st January, 2018 in respect of this share is Rs. 120, there will be no tax on the gain of Rs. 20/- if this share is sold after one year from the date of purchase.

However, any gain in excess of Rs. 20 earned after 31st January, 2018 will be taxed at 10% if this share is sold after 31st July,2018.

The gains from equity share held up to one year will remain short-term capital gain and will continue to be taxed at the rate of 15%.

"In view of grandfathering, this change in capital gain tax will bring marginal revenue gain of about Rs. 20,000 crores in the first year. The revenues in subsequent years may be more" said FM justifying the amendment in the taxation regime.

Now, it has to be seen that, what kind of effect it brings to the capital markets and how various classes of investors such as HNI and FDIs would see it.

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