Budget 2018: Worried about LTCG on equities? Here’s why investing in stocks still remains attractive

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Updated: February 2, 2018 12:06:06 PM

Union Budget 2018: Even as Finance Minister Arun Jaitley introduces Long Term Capital Gains tax on equities in Union Budget 2018, Alok Singh, Chief Investment Officer, BOI AXA Mutual Fund tells FE Online that despite some disappointment, equities remain an attractive investment proposition.

FM Arun Jaitley presents Union Budget 2018 today.Union Budget 2018: Finance Minister Arun Jaitley introduced long term capital gains tax on equities for gains exceeding Rs 1 lakh at the rate of 10%. (Image: Reuters)

Union Budget 2018: Even as Finance Minister Arun Jaitley introduces Long Term Capital Gains tax on equities in Union Budget 2018, Alok Singh, Chief Investment Officer, BOI AXA Mutual Fund tells FE Online that despite some disappointment, equities remain an attractive investment proposition. The CIO noted that there is some disappointment as the government has reintroduced LTCG, while retaining the STT (Securities Transaction Tax). Notably, the government had introduced STT in 2004, after introducing the LTCG exemption.

Explaining why equities remain an attractive alternative despite the change, Alok Singh said, “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,” the expert said adding the move will not induce any negative sentiment as investors are likely to stay invested for want of better opportunities.

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In his Union Budget 2018 presentation Finance Minister Arun Jaitley observed that the return on investment in equity is already quite attractive even without tax exemption. Notably, long term capital gains exceeding Rs 1 lakh will be taxed at the rate of 10% without allowing the benefit of any indexation. However, all gains up to 31st January, 2018 will be grandfathered.

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Here’s an illustrative example to understand the implications. For example, if a share of ABC 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 ABC 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. 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%.

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Explaining the tax treatment, CA Vrinda Aggarwal, an independent tax consultant highlighted as detailed below-   

One needs to segregate this Long Term capital gain into two parts-

  1. a) Part one – is LT 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 LT 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.

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