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Implementation of LTCG Tax and other Budget Proposals

In this world nothing can be said to be certain, except death and taxes

-Benjamin Franklin

With the beginning of the new financial year, several new proposals presented in the budget 2018-19 would be implemented from April 1, 2018.

One of these is the reintroduction of Long Term Capital Gain (LTCG) Tax after a gap of 14 years. A 10% tax will be levied on gains over and above Rs 1 Lakh arising from the sale of shares or equity mutual fund schemes which are held for over 12 months.

This LTCG tax is expected to generate a revenue of Rs 20,000 crore in the first year which would increase in subsequent years.


What is Long Term Capital Gain?

It is a tax which is levied on the profit generated (if any) by sale of an asset like shares, securities or real estate which is held for a longer time say 12 months or more depending on the asset.  

In 2004-05, this LTCG tax was scrapped by the then finance minister P Chidambaram and was replaced by Securities Transaction Tax (STT)

Securities Transaction Tax (STT) it is a tax payable on every sale or purchase of securities listed on Indian stock exchanges.

Presently, 15% tax is being levied on capital gains made on shares sold before 12 months of purchase. Tax on long term gains i.e. gain on shares sold after a year of purchase was nil until now. There is a 30% tax on short term capital gains while LTCG on unlisted shares is 20%.


Before moving forward let us discuss some common terms used in this context:


Grandfathering is an exemption clause whereby the existing investors who have made investments as per the earlier tax laws would be protected against the new stricter tax law. For LTCG, gains made on sale of shares or equity mutual funds till 31st January will be exempted from this tax.


Indexation allows one to inflate the purchase price of the asset using a cost Inflation Index. This helps investors to save taxes in long term debt funds.

How it Works?

When the purchase price is increased, the capital gain from the asset (calculated by deducting the purchase price from the selling price) would also reduce, thereby reducing the tax liability.

As per the latest amendment to the bill, Government has extended the Indexation benefit for calculating tax liability on sale of shares listed after 31st January, which was earlier not allowed. Capital gains from such transactions will be taxed at 20%.



Increase in IPO’s

There has been a sudden increase in the issue of IPOs in the past month, this can be partially attributed to the introduction of the Long Term Capital Gains Tax. Investors are in a frenzy to disinvest from the unlisted companies before the deadline of 31st March which is in the current fiscal year.

There have been perspectives as to whether the introduction of LTCG Tax Rate affected the unlisted companies. In the earlier Tax Regime, a transfer of shares transaction was exempted only if the transaction was charged with Securities Transaction Tax(STT) which was not applicable to the unlisted companies, hence bringing them under the Long Terms Capital Gain Tax preview of 20%. Now, under the new Tax Regime Capitals Gains Tax will also be levied on sale through IPOs from 1st April.

The factor that is responsible for determining whether the existing shareholders of the companies that have issued IPOs in the last month have escaped the purview of the new Tax Regime is the date of transfer. If the date of transfer is before 1st April only then the investors can escape the tax levy.


Impact on Foreign Institutional Investment

The introduction of LTCG tax has brought in complexity of investing and has increased the cost of investing in India when compared to other jurisdictions. A domestic investor is without a choice but a foreign investor will opt for the market which has lower complications and higher returns. An investor abstains from investing in these markets due complexity in the period of holding and the rate of tax for different investments.

The investment of FII’s in the last year has been $3.3 billion.

Equity Mutual funds are also at disadvantage when compared to Unit-Linked Insurance Plans (ULIPS) and National Pension Scheme ( NPS ) which are out of the purview of the new Tax Regime, this gives a Tax disadvantage to equity MFs.

There are reasons to believe that the LTCG tax rate will have little impact on the long term investment. It may be business as usual and routine in the market, had there not been the Grandfathering Clause attached, there would have concerns and chaos in the minds of the investors.


Budget proposals coming into effect from April 1, 2018

Along with LTCG Tax, there are several other Budget proposal that will come into effect from April 1, 2018.

  • Corporate tax on businesses ,with up to Rs 250 crore turnover ,has been reduced to 25% from 30%. This will have a positive impact on micro,small and medium enterprises which accounts of almost 99% of the companies.
  • In this Budget , there is a reintroduction of standard deduction which comes as a relief for almost 2.5 crore salaried employees. A deduction of Rs 40,000 in place of existent deductions of Rs 19,200 for transport allowance and Rs 15,000 for medical reimbursement will come into effect. The salaried taxpayers will get a flat deduction of Rs 40,000 as a result.
  • The government has increased health and education cess from 3% to 4% on income tax for individual taxpayers on the amount of income tax payable.
  • Exemption limit from income raised by five folds from 10,000 to Rs 50,000 every year. No TDS will be deducted from the interest  pay of senior citizens. The point of confinement of finding for medical coverage premium and heath likewise expanded to Rs 50,000 from Rs 30,000 under Section 80D. This extra conclusion of Rs 20,000 will enable a citizen to set aside to Rs 6,000 for each annum. For senior and extremely senior citizens, the duty finding for basic disease will be Rs 1 lakh from April 1, as against the current furthest reaches of Rs 60,000 for senior residents and Rs 80,000 for exceptionally senior.
  • The benefit of tax-free withdrawal to non-employee subscribers  on withdrawal from NPS (National Pension System) has also been extended. Currently, the non-employee subscribers currently don’t enjoy this exemption, but this will come into effect from this year.




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