Ever since the Budget 2018 was announced all one could discuss was the Ltcg tax and how it affects us. The last time such a tax was there was back in 2004-2005, but the government has decided to bring it back and it sure is going to affect you, let’s find out how:
What are capital gains?
The gains made on selling any capital asset such as securities, land/building, house property and other assets as defined as capital assets under the Income Tax Act, are called as Capital Gains.
Capital gains are divided as:
The division of short term and long term capital gains differ from asset to asset however in this case we are talking about capital gains made only on securities.
- Short Term Capital Gains (STCG): Asset being listed security held for less than 12 months and gains made on the sale of such asset is STCG/STCL.
- Long-Term Capital Gains (LTCG): Asset being unlisted securities, units of the fund, held for more than 12 months, and gains made on the sale of such asset is LTCG/LTCL
What’s the CURRENT tax on these gains?
Currently, STCG is taxed at 15% (if STT paid while buying and selling) & LTCG is exempt from tax.
What’s the PROPOSED tax on these gains and Why?
The finance minister in his Budget 2018 announcement stated that after 1st April 2018 any long-term capital gains above Rs. 1, 00,000 will be subject to 10% tax. This tax is without any inflation indexation benefit which means there will be no benefit to adjust gains as per inflation levels.
According to reports the government is estimated to lose out on Rs. 50,000 crores every year because of no tax on LTCG. And since equity has become a favorable investment option for people it only made sense to bring back this tax.
Also Read: THE ONLY 5 GST QUESTIONS THAT MATTER TO ALL OF US
This tax was earlier abolished in 2004-2005 to prevent round-tripping of money arising from the India Mauritius Tax Treaty. But the round-tripping problem could not be resolved so the Treaty was amended in May 2016 reserves the right to tax LTCG acquired on or after April 2017. Now that the amendment is passed the government is free to tax LTCG.
Which investments get affected?
If you make LTCG on equity shares, equity-oriented mutual funds or units of a business trust, above Rs. 1,00,000 they will be taxed at 10%.
In order to give relief to existing investors, there is a ‘grandfathering clause’. What exactly does that mean?
Many investors would have made investments keeping in mind the benefit of zero tax on LTCG, so that’s why to protect these existing investors the government has announced that any capital gains from shares or equity mutual funds made till 31st January will be grandfathered – or exempted.
This means that any profits made after March 31st will be taxed at 10%, but since gains made before January 31st are grandfathered, to calculate tax, the higher of these two would be taken: Cost of acquisition or the closing price on 31st January 2018.
Also if you sell before March 31 a stock that has been held for more than a year, will still be under current tax and you won’t have to pay any tax at all.
Here are examples to make this simpler:
- Suppose you buy a share on January 20th, 2017 for Rs. 100:
Closing price on January 31st, 2018 is Rs. 200
Price on April 01st 2018 is Rs. 250
Capital Gains=
Rs. 250 – Rs. 200= Rs. 50
- Suppose you buy a share on January 20th, 2017 for Rs. 100
Closing price on January 31st, 2018 is Rs. 50
Price on April 01st 2018 is Rs. 150
Capital Gains=
Rs. 150-Rs. 100= Rs. 50
- Suppose you buy a share on January 20th, 2017 for Rs. 200
Closing price on January 31st, 2018 is Rs. 100
Price on April 01st 2018 is Rs. 200
Capital Gains=
Rs. 200-Rs. 200= Rs.0
- Suppose you buy a share on January 20th, 2017 for Rs. 100
Closing price on January 31st, 2018 is Rs. 200
Price on April 01st 2018 is Rs.150
LTCG: Rs. 0 because of loss of Rs. 50
Earlier STT securities transaction tax was imposed on the sale and purchase of shares due to the exemption of LTCG but now STT and LTCG both are applied. A 10% tax on LTCG might seem like a small amount to pay but it does impact your overall profit. Moreover, tax on LTCG will also increase the expense ratio in active mutual funds. And now since taxes are applied on all long-term capital gains it puts all assets classes at par with one another, no longer making tax a decisive factor while investing.
Most foreign countries apart from U.S., China, Germany, South Korea and Brazil charge a capital gains tax and some countries it is much higher than 10%. So contrary to popular belief if India continues showing growth potential then LTCG tax will not dissuade FIIs and FPI’s from investing in India.
What should you do?
One invests to earn a certain percentage of return to be received in the future. So, if you want to earn a return of 20% in 2 years, you need to increase your investment by taking the tax component into consideration.
Example: Return required= Rs. 20
Earlier on sale of Asset, receivable = 120, amount invested= Rs. 100, therefore return = Rs. 20
Now, in order to keep your return constant, i.e., Rs. 20, increase your investment by Rs. 11, i.e.,
Investment = 111
Return of 20% = 22
Needed Sale consideration = 132
Tax =2 (132-111)*10%
Return = Rs. 20
This is just one of the ways to earn the desired return on an investment made.
Yes, taxing LTCG has its cons, but, let it not stop you from earning the desired return!
Plan your investments!
Happy investing!
The post Tax On LTCG And What It Means appeared first on Flexiloans.
This post first appeared on TOP TIPS TO AVOID CASH FLOW PROBLEMS IN INDIA, please read the originial post: here
