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Budget 2018: LTCG, The Long-Term Capital Gain Tax

Budget 2018

The morning of February 1st, changed the economics of India. This was expected as every Indian was eagerly awaiting the announcement of the Budget in the parliament. As our finance minister, Mr. Arun Jaitley, started speaking, all eyes were on the television screen and all hearts expecting major breakthrough. He spoke mainly on infrastructure building, healthcare, education, agriculture sector, rural development etc.

The phones of our office started ringing as he spoke on the long term capital gains tax. Well, it came as a shocker to many and the queries have not stopped ever since that day. So putting a rest to all the questions, our team have come up with an explanation.

Taxation of LTCG: As per the current laws of the IT Act, when a person invest in listed equity shares or mutual funds and sells the same after a year of holding, the LTCG i.e the long-term capital gains would be exempted from tax. However, the Budget 2018 has proposed a 10% Tax on the gains which exceed Rs 1 lakh per annum. The dividends received from the listed equity or mutual funds will continue to be exempted unless the amount received exceed Rs 10 lakhs. The taxable income which is derived after considering the above mentioned deduction and exemptions would be taxed based on the individual slab rates.

What was the need for such Tax?

Well, the LTCG Tax was abolished in 2005. When this announcement, we at wisely invest were anticipating it, as the imposition of LTCG Tax on equities have been echoing for long and the markets have felt the heat of this Tax to make a come back. Even our Prime Minister on December 24th, 2016 commented on low contribution of taxes which is due to our existing structure of tax laws. Also the investors were trying to put investments in the stocks and get tax free income. There was no incentive to go to manufacturing. rather it was creating a disincentive for manufacturing. Therefore, there was a need to have a balance in the taxation system.”Mr. Chandra told PTI.

Effects of the LTCG

There are mixed reactions running in the market regarding the LTCG Tax. Some say this is not a welcome move from the point of view of the investors who are investing in these equity shares or mutual funds as their major intention is of savings and growth. On the other hand people like Mr. G. Pradeepkumar ( chief executive officer of Union Asset Management Company) , Mr.Kamlesh Rao (MD & CEO at Kotak Securities) and Mr.Partho Dasgupta (Partner Tax and Regulatory services BDO India) have said rationalization of LTCG was expected and though negative on sentiments, equities remains as attractive as ever and the returns will absorb this 10 percent if corporate earnings growth happens as expected. Also they have stated that the grandfathering provision of taxing the LTCG with January 31, 2018 being a cut off date would come as a sigh of relief with the market prices, touching all time high for exempting actual gains accruing to investors in the future. Along with many others, we at wisely invest also welcome the grandfathering provision, and strongly feel it would act as a soothing factor. In the long term, taxing the capital gains will create greater opportunities & development for our country and is healthy for overall economy. The small investors who come through mutual funds have been protected by exempting gains upto Rs 1 lakh. So, we conclude with the statement by Mr. Jayant Manglik, President of Religare Broking that, other than a knee jerk reaction, the equity market will not be impacted in the medium or long term as it is still the only real investment opportunity available.


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