Budget 2018-2019: Long Term Capital Gains from Equity to be taxed at 10% – Implications

In his budget speech today, the Finance minister announced 10% tax (without indexation) for capital gains exceeding one lakh from all direct equity and equity mutual funds. However, all capital gains until Jan 31 2018 will be grandfathered, that is still subject to old rules. Short-term capital gains tax remains at 15%.

Also read: Budget 2018-2019 Major Benefits to Senior Citizens!

UPDATE: Equity LTCG Taxation: How much tax do I need to pay? Illustration part 1

Definitions of equity oriented fund as per Finance Bill 2018

Quoted from the memorandum (see below)

In a case where the fund invests in the units of another fund which is traded on a recognized stock exchange,-
(I) A minimum of 90 per cent. of the total proceeds of such funds is invested in the units of such other fund ; and
(II) such other fund also invests a minimum of 90 percent. of its total proceeds in the equity shares of domestic
companies listed on a recognized stock exchange;

and
b) in any other case, a minimum of 65 per cent. of the total proceeds of such fund is invested in the equity shares of
domestic companies listed on the recognized stock exchange.

 

Dividend distribution tax on dividend from in an equity oriented fund

Dividends from equity mutual funds will also be subject to 10% tax at source from 1st April 2018.

What should we do now?  Invest as if nothing happened! Pay the tax! Taxes and hard work never killed anyone. There is no benefit is selling now and buying again. The government made sure of that. If you sell now, the LTCG will be tax free up to Jan 31st and anway you need to invest again and then pay tax again!!

The long term capital gains until 31st Jan 2018 are free from tax. Only the long term gains made from 1st Feb 2018 will be subject to tax. So existing investors will also benefit from this.

Update: Long Term Capital Gains Taxation from Equity: Examples (Budget 2018-2019)

UPDATE: Equity LTCG Taxation: How much tax do I need to pay? Illustration part 1

What are the implications of this?

It would be harder to sell mutual funds to senior citizens as they now have other options. Monthly dividend mutual fund sales will take a hit. Also a positive.

As long-term investors, we should be happy to pay the taxes the country needs. I am sure most of you will disagree, but this is a non-event.

While there is a limit of 1L on LTCG, I assume this is a one lakh per financial year.

Reference: Budget 2018-2019 memorandum

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20 thoughts on “Budget 2018-2019: Long Term Capital Gains from Equity to be taxed at 10% – Implications

  1. “Taxes and hardwork never killed anyone”

    English Revolution in 1640s, American Revolution in 1770s and French Revolution of 1790s were the direct result of Taxes and killed millions of people. 😛

  2. I feel at least FM should have announced indexation benefit for equity investment which are more than 3 years old.

  3. Budget 2018 has imposed LTCG on equity gains at 10% without indexation. Does this mean that a higher churn will incur lower LTCG tax vis-a-vis a lower churn? For eg, if an investor holds the same fund over 5 years the accumulated gains will be higher than if the investor sells and purchases the same fund 3-4 times over the same 5 year period.

  4. Shouldn’t the gains be grandfathered to March 31 if intent is to make sure investors don’t redeem or sell un-necessarily. If say the market gains are net +ve for Feb and March,Onewould like to book profits of those 2 months to avoid tax (10% of the gains from Jan 31 if and when redeemed) for that amount. I can redeem on March 31 and buy the same things on April 3,4 when I get money back.No tax for current FY. Ofcourse if the market is range bound or loses then it may not matter.

    If the LTCG up to 1Lakh attracts no tax, people would always redeem and reinvest upto that amount every year end as it saves 10K – again unnecessary stuff. (Applicable to all people who have unrealized LTCG of 1Lakh)

    I thought of switching all funds to dividend option but that loophole is fixed 🙂 I am sure there will be more clarifications.

  5. Very nice post – short and has all the information on the implications. I totally agree with your statement that “Taxes and hard work never killed anyone.” India needs a new mindset of honesty and spirit of caring and sharing with the needy. And of course determination to work hard for self and others. The world still exists because a few everywhere had others’ good before self. Let this spirit grow and engulf more and more of us who possess more than we use or ever need. We need to leave behind a legacy for others to follow and not a corpus for our next generation.

  6. This BJP government just pulled the last straw that broke the camel’s back. They have destroyed the lives of common man with each and every policy they have introduced in the last 4 years. Interest rates in all schemes have reduced to nothing and now they are dipping their dirty hands in Equity as well which was the last hope for people.

    They have gone too far this time. I don’t see any reason to invest in equity now. Why should I pay tax when I am taking all the risk by investing in equities? Modi will learn his lesson when people start to pull out of equities and the growth of economy comes to a standstill. Proud of paying tax? Yeah right. We live in a country where 90% of public money is wasted in scams and irresponsible and unnecessary schemes.

    Modi has already destroyed India’s economy with demonetization which is evident from the severe hit in GDP and now this must be another one of his masterstrokes. I can’t believe people like me were brainwashed to vote for this saffron party. Enough is enough. The mistake will be rectified in 2019.

  7. “this is a non-event.”
    I wish I were rich enough to concur. 🙁

    “Taxes and hard work never killed anyone.”
    Yeah, right.And if one accepts that argument, then why should agricultural income be tax-free? Why doesn’t any government have the guts to close this huge, glaring loophole?

    STT was imposed as a substitute for LTCG tax. Now LTCG tax is back, and STT continues! So we get the worst of both worlds.

    I agree with Mr. Anjan. This isn’t what we voted the BJP to power for. They were supposed to be a right-wing party, but, after coming to power, have been basically UPA-lite.

  8. This is extremely irritating. What this means is, if I need to exit a badly performing Equity MF and invest all that money in another Fund, I’ll have to pay LTCG tax first, if I’m exiting after a year, if the gain is more than a lakh.

  9. This government tried to tax EPF previously, on withdrawal, a couple of years ago. Then they rolled that decision back. Hopefully they’ll roll this decision (LTGC on Equity MF) back too.

    Let them tax real estate and go after people with 2, 3 or 4 houses. Leave equity alone.

  10. Pattu Sir, LTCG at 10% for MF is unjustifiable but for direct stock trading it is OK. The reason is that MFs when they are selling their stocks will be paying 10% LTCG, the investor who redem will also pay LTCG 10% that means effectively it will be 20% for genuine long term investor. Where is the justice? while Govt is not offering indexation benefit or any capital protection assurance who will invest in equity MFs? The allocation of 39K+59K will go into the pockets of political people not to the population intended. Virtually this money will be used for buying rural votes in the forthcoming election.

  11. Just making sure I understand this right.

    In his budget speech today, the Finance minister announced 10% tax (without indexation) for capital gains exceeding one lakh from all direct equity and equity mutual funds.

    Does this mean that in an FY, if I sell equity shares (after holding them for 1 year), and my capital gains are 99000/-, it still remains tax free?

    Is my inference correct?

Comments are closed.