The 2018 Union Budget saw the reintroduction of the Long Term Capital Gains (LTCG) tax on equities. Long-term gains above the threshold limit of Rs 1 lakh earned in a financial year are taxable at 10% without the benefit of indexation.
This has caused a massive dent in the investors’ confidence as LTCG taxation at 10% imposes an additional tax burden because of other transaction taxes already in place and a limited investment period of one year.
The then finance minister had said that it was decided to reintroduce LTCG tax to generate marginal revenue gain of Rs 20,000 crore in the first year and this gain is expected to increase in the future years.
Impacts of the Reintroduction of LTCG
The reintroduction of LTCG tax may not prove fruitful in an equity market that has been volatile due to various international trade factors and domestic economic factors.
Equity investors are hoping for the government to do away with LTCG tax.
The government had previously introduced Securities Transaction Tax (STT) on listed securities, and this was the reason behind the removal of LTCG tax. Equity investors are now paying both LTCG tax and STT.
Securities Transaction Tax
LTCG tax existed till October 2004 and was replaced by the Securities Transaction Tax (STT). STT is levied on all transactions made in the stock market.
STT rates are as mentioned in the table given below:
|Taxable securities transaction||Rate of STT||Individual responsible to pay STT||Value on which STT is required to be paid|
|Delivery based purchase of equity share||0.1%||Purchaser||Price at which equity share is purchased*|
|Delivery based sale of an equity share||0.1%||Seller||Rate at which equity share is sold*|
|Delivery based sale of a unit of oriented mutual fund||0.001%||Seller||Price at which unit is sold*|
|Sale of equity share or unit of equity oriented mutual fund in a recognised stock exchange otherwise than by actual delivery or transfer and intraday traded shares||0.025%||Seller||Price at which equity share or unit is sold*|
|Derivative – Sale of option in securities||0.017%||Seller||Option premium|
|Derivative – Sale of option in securities where the option is exercised||0.125%||Purchaser||Settlement price|
|Derivative – Sale of futures in securities||0.01%||Seller||Rate at which such futures are traded|
|Sale of unit of an equity oriented fund to the Mutual Fund – Exchange traded funds (ETFs)||0.001%||Seller||Price at which unit is sold*|
|Sale of unlisted shares under an offer for sale to the public included in IPO and where such shares are subsequently listed in stock exchanges||0.2%||Seller||Price at which such shares are sold*|
|PURCHASE OF UNITS OF EQUITY ORIENTED MUTUAL FUNDS||NIL||PURCHASER||NA|
There were concerns raised on individuals avoiding LTCG through stock exchanges by paying a nominal STT component.
Calculation of LTCG tax:
The finance minister, last year in his budget speech, said that all gains recorded before 31 January 2018 would be grandfathered. ‘Grandfathering’ is an act of exempting existing benefits until the cut-off date from the new regulations.
Consider the following example: you bought shares in January 2017 at Rs 150, and the share price touched Rs 300, as on January 31, 2018. If you have sold the share at Rs 400 sometime after January 31, 2018, then your taxable gain would be Rs 100. (Rs 400-300).
Individuals liable to pay LTCG
All individuals trading in the Indian stock market is liable to pay LTCG tax. What has added burden on the trading taxpayers is that the government has retained STT and has added LTCG tax.
Foreign portfolio investors are also subject to LTCG taxation. However, they can avail exemption on LTCG tax, depending on their home country’s status of Double Tax Avoidance Agreement (DTAA) with India.