Budget 2018: What 10% LTCG tax on gains over Rs 100k means for investors

Finance Minister Arun Jaitley has kept the short-term capital gains tax rate and holding tenure unchanged at 15% in Union Budget 2018-19

Budget 2018 has proposed to levy long-term capital gains tax (LTCG) of 10% on gains exceeding Rs 100,000 from sale of equity shares. However, capital gains made on shares until January 31, 2018, would be grandfathered, the finance minister said. Also, there has been no change in the definition of short-term capital gains tax (STCG).

“The much-anticipated introduction of LTCG is now back with a new avatar. As we know in tax legislation, this could only get worse over a period of time with every successive Budget diluting the original commitment of taxing long-term gains,” said Milind Kothari, managing partner at BDO India.

While LTCG tax has been imposed, there is no tinkering on Securities Transaction Tax (STT), which makes India as probably only country in the world to have both taxes at the same time. Grandfathering of cost prices for LTCG will prevent any knee jerk reaction in stock prices but imposition of tax is a clear negative for equity markets as far as sentiments are concerned, analysts say.

Given the development, experts believe investors could look to lock in gains – at least in the short term – given that the new proposal exempts gains made till January 31, 2018.

“Most investors will attempt to book their profits made during the recent bull-run and escape imposition of LTCG to be imposed post 31st January 2018,” said Monish Panda, Founder, Monish Panda & Associates.

 

LTCG on sale of shares / stocks was removed in 2005, making India one of the most liberal stock market regimes. However, there were demands from a section of stakeholders that the LTCG tax on equities be brought back. The BSE, according to reports, had informed the government that the revenue forgone on the LTCG tax exemption on listed securities could be Rs 500 billion per year.

“The proposal to levy long term capital gains tax on equities at rate of 10% is a negative surprise but not the limited rate with grandfathering of purchases up to Jan 31, 2018 would mitigate the adverse impact to a large extent. Overall, we believe that the focus would revert to corporate earnings with little impact of Union Budget on bond yields and equity markets,” feels Gaurav Dua, Head of Research, Sharekhan.