Budget 2018: Long Term Capital Gains Tax On Equity Gains Above 1L

The government brought back a tax on long-term capital gains on listed equities. Announcing the Union Budget for 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 capital gains made before 31 January 2018 will be exempt.

The “modest changes” in the tax regime will bring in a marginal revenue of Rs 20,000 crore in 2018-19, Jaitley said. A 10 percent tax has also been announced on the distributed income by mutual funds. This will be effective immediately.

The total amount of exemption offered for capital gains was at Rs 3.67 lakh crore in 2017-18, Jaitley said.

The return on investment in equity is attractive even without taxes.

Arun Jaitley, Finance Minister

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

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.

(This article was originally published on BloombergQuint.)