Budget 2018: Here’s why small investors need not worry about LTCG tax on equities

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Updated: February 2, 2018 2:44:21 PM

Budget 2018: Even as the stock markets feel the jitters of the introduction of LTCG tax on equities by Finance Minister Arun Jaitley, analysts point out that small investors need not worry about their investments as the tax applies only to stock market gains exceeding Rs 1 lakh.

Budget 2018: Finance Minister Arun Jaitley announced world's largest health care scheme in his Budget 2018 speech which is now being hailed as 'ModiCare'Budget 2018: Finance Minister Arun Jaitley said that it is the most appropriate time to introduce LTCG tax on equities. (Image: Reuters)

Budget 2018: Even as the stock markets feel the jitters of the introduction of LTCG tax on equities by Finance Minister Arun Jaitley, analysts point out that small investors need not worry about their investments as the tax applies only to stock market gains exceeding Rs 1 lakh. Further, experts say that grandfathering of gains till 31st January 2018 will also come as a relief to investors. “The fact that previous gains made till 31st January will be grandfathered will come as a relief to investors,” Alok Singh, Chief Investment Officer, BOI AXA mutual fund told FE Online.

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Analysts point out that the threshold of Rs 1 lakh is substantial for retail investors. “Generally, small investors do not book profit in excess of Rs 1 lakh in the year. The move is aimed at collecting taxes from the institutions and HNIs. Long term capital gains tax in excess of Rs 1 lakh should not burden too many small investors,” Harshil Shethia, BP Wealth told FE Online.

Notably, after the change in rules, the long term capital gains made till 31st January 2018 will be grandfathered. The investors will be taxed only on the long term capital gains made on the shares after January 31st 2018. “ Rs 1 lakh threshold for gains in one year is substantial for retail investors. I don’t see it hurting small investors, though HNIs and other investors booking profits in excess of Rs 1 lakh maybe hurt,” an analyst who did not wish to be identified told FE Online.

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

Here’s an illustrative example to understand the implications, after the imposition of long-term capital gains. For example, if a share of AB 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 AB 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.

Calculate:  Income tax impact of Budget 2018. Calculate gain or loss with this Income Tax Calculator

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%. Hence, if you are sitting on substantial gains from shares of a particular company purchased, say in 1991, the gains made till 31st January 2018 will not be taxed. Only the incremental long term capital gain made after January 31st 2018 will be taxed at 10%.

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