Union Budget 2018: 10% Tax On Long-Term Equity Gains Of Over Rs 1 Lakh

Long-term capital gains of over Rs 1 lakh via share sales will be taxed at 10 percent.

A broker reacts while trading at a stock brokerage firm in Mumbai.  (Photo: Reuters)
A broker reacts while trading at a stock brokerage firm in Mumbai. (Photo: Reuters)

The government brought back a tax on long-term capital gains on listed equities. In his speech for Union Budget 2018-19, Finance Minister Arun Jaitley said that long-term capital gains of over Rs 1 lakh will be taxed at 10 percent without the benefit of indexation.

The “modest changes” in the tax regime will bring in a marginal revenue of Rs 20,000 crore in 2018-19, Jaitley said. To provide perspective, he said the total amount of long-term capital gains was at Rs 3.67 lakh crore in 2016-17.

Jaitley also announced a 10 percent tax on the distributed income by mutual funds. This will be effective immediately.

According to the budget proposal:

  • Any person who sells shares after April 1, 2018 will pay a long-term capital gains tax at the rate of 10 percent on gains of more than Rs 1 lakh. For such shares, the notional cost of acquisition will be price on Jan. 31, 2018.
  • If a person who has held shares for more than one year sells them before March 31, 2018, there will be no long-term capital gains tax.
  • A person who sells shares after April 1, 2018, at a loss, the cost of acquisition for such shares would be the price on the actual date of acquisition and not the notional cost on Jan. 31, 2018.
The return on investment in equity is attractive even without tax exemptions.
Finance Minister Arun Jaitley.

No changes have been made to the existing short-term capital gains tax regime. They’ll continue to be taxed at 15 percent.

No Big Deal, Say Market Veterans

This was on expected lines and has already resulted in a knee-jerk reaction from the markets, said Nilesh Shah, chief executive officer of Envision Capital. “I don’t think it’s going to change the course of the markets. They will learn to live in this new reality. I don’t think this in any way will impact incremental investment.”

Agreed Taimur Baig, chief economist at DBS Group Research. “It will not be a big deal at all.” That's because by international standards, a 10 percent tax rate is not prohibitive, he said.

India at 10 percent with all the grandfathering will only be a medium-term negative for the market. It will live with it.
Taimur Baig, MD & Chief Economist, DBS Group Research

Baig said many countries, developing and developed, have had successful capital gains tax regimes with a significant degree of compliance at a much higher rates.

Market veteran Madhusudan Kela does not expect money to move out of equity markets into other asset classes as a result of the tax. Stocks will continue to remain attractive, he added.

Considering you make 16-17 percent return on equity in longer term and 10 percent goes away as tax you will still be left with 14-15 percent return which is far better than what you get in gold, debt or real estate.
Madhusudan Kela, Market Veteran

Manish Chokhani, director Enam Holdings agrees. He remains fully invested in Indian equities, calling them “the best asset class in the country”.

“The reality is that if your company is going to perform and your company’s stock is going to go up, would you not buy it because you will have to pay a tax at the end? I don’t think that’s the answer. So for Indian investors I don’t think we have a choice. You pay and live with it and it is the right of the government to ask whatever it wants from the citizen to pay tax.”

The Backdrop

The long-term capital gains tax existed until 2005 but was removed to encourage greater participation in the equity markets. In recent years, retail investor interest in equity markets has picked up substantially.

Average equity flows are to the tune of a billion dollars a month. The number of mutual fund folios rose by 1.37 crore in 2017 to an all-time high of 6.65 crore. The decision to change the structure of long-term capital gains comes against this backdrop.

Ahead of the budget, tax experts told BloombergQuint that in the absence of data on revenue foregone on account of the LTCG exemption, it is tough to make a clear case for or against the return of the tax. They argued that if the government brings back long-term capital gains tax, it should do away with the Securities Transaction Tax or STT. The Union Budget 2016-17 estimated Rs 7,767 crore in STT collections.

Meanwhile, income tax data for the financial year 2014-15 show that total long-term capital gains across companies, firms, and individuals, amounted to Rs 84,847 crore. But this likely includes LTCG on equity and other asset classes such as real estate.

One other argument in favour of reimposing LTCG tax on listed equities is that it helps correct India’s tax skew towards indirect taxes. From a tax-to-GDP ratio of 3.3 percent for direct tax and 10.73 percent for indirect tax in 2000-01, India has taken 18 years to improve to 5.79 percent and 10.55 percent, respectively.