Budget 2018: FM Arun Jaitley explains why LTCG on equities was introduced in Union Budget 2018

By: |
Updated: February 2, 2018 12:05:39 PM

Budget 2018: Even as the equity markets turned jittery on Thursday, after the introduction of long term capital gains tax for profits on equities exceeding Rs 1 lakh, Finance Minister Arun Jaitley said that it was a tough call for the government, and the move had been pending for years.

Union Budget 2018: Arun Jaitley looked dapper in the grey kurta and black Nehru jacketUnion Budget 2018: Arun Jaitley said that it was the most appropriate time to introduce long term capital gains tax on equities. (Image: Reuters)

Budget 2018: Even as the equity markets turned jittery on Thursday, after the introduction of long term capital gains tax for profits on equities exceeding Rs 1 lakh, Finance Minister Arun Jaitley said that it was a tough call for the government, and the move had been pending for years. “The tax compliance levels are still low in India, and the space available in taxation policy is very limited for the government,” Arun Jaitley said adding that this was the most appropriate time to introduce long term capital gains tax on equities. Speaking to FE Online on this development, Alok Singh, Chief Investment Officer, BOI AXA mutual fund said that even though the move will come as a slight disappointment to the investors, as  the government has reintroduced LTCG, while retaining the STT (Securities Transaction Tax), investing in equities will remain lucrative.

Also read: Budget 2018: The story of the Budget briefcase | 5 things we bet you didn’t know

Also read: Budget 2018: Finance Minister Arun Jaitley explains rural and healthcare push

“Historically, equity has delivered better returns. Even after the introduction of LTCG equities remain attractive. Equities are one of the only asset classes where you can expect double digit returns. Further, the fact that previous gains made till 31st January will be grandfathered will come as a relief to investors,” Alok Singh told FE Online.

Here’s an illustrative example to understand the implications, after the imposition of long-term capital gains. For example, if a share of XYZ company is purchased six months before 31st January, 2018 (On 31st July 2017) at Rs 100 and the highest price quoted on 31st January, 2018 for XYZ company 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, and the share is sold for below Rs 120.

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 (after one year from the date of purchase). 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%.

Also read: Income Tax Calculator: Find out how Budget 2018 will impact your finances

Explaining the tax treatment going forward, CA Vrinda Aggarwal, an independent tax consultant illustrated-

  1. What happens to my tax liability if I sell stocks starting today held for more than a year?

Ans – As for Long Term Capital gains made in Financial Year 17-18 (i.e sale upto 31st Mar 2018), it appears there is no tax. However, any sale made after 1st April 2018 will be liable to the new LTCG tax. One needs to segregate this LT capital gain into two parts

  1. a) Part one – is Long Term Capital gains made upto 31st Jan 2018. This will be highest price of the stock on 31st Jan 2018 minus the cost of acquiring stock;
  2. b) Part two – is Long Term Capital gains made after 31st Jan 2018. This will be sale price minus highest price of the stock on 31st Jan 2018.

While Part one will be exempt. It is the Part two that will be assessed as LT Capital gains (it can also be a Capital loss) for Tax. Tax on this will be computed at the rate of 10% (+ cess of 3%) only if exceeds Rs 1 Lakh.

For latest coverage on Budget 2019-20 log on to financialexpress.com. We bring you full coverage of Union Budget 2019 Live. Stay Connected.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Switch to Hindi Edition
FinancialExpress_1x1_Imp_Desktop