Pay LTGC Tax On Long-Term Capital Assets From April 1; All You Need To Know
February 8th, 2018 / 1:22 PM
The Long-Term Capital Gains (LTCG) tax on equities, which was scrapped in 2004-05, is to be levied from April 1, 2018. The government’s move can be seen as an attempt to lessen the huge fiscal deficit it is currently coping with.
What is LTCG?
Long-term capital gains mean the profits arising from the transfer of a long-term capital asset. The Finance Bill, 2018, proposes to provide for a new LTCG tax regime for equity shares in a company listed on a recognised stock exchange, unit of an equity-oriented fund and unit for a business trust.
How will LTCG be calculated?
Under the proposed Section 112A of the Income Tax Act, 1961, vide clause 31 of the Finance Bill, 2018, LTCG from transfer of long-term capital assets exceeding Rs 1 lakh will be taxed at 10% if the assets are held for a minimum period of twelve months from the date of acquisition and if the Securities Transaction Tax (STT) is paid at the time of transfer. However, in the case of the equity shares acquired after October 1, 2014, STT is required to be paid even at the time of acquisition (subject to notified exemptions).
What is STT?
Securities Transaction Tax is a type of direct tax payable on the value of taxable securities transactions done through a recognised stock exchange in the country. The securities on which STT is applicable are shares, bonds, debentures, derivatives, units issued by any collective investment scheme, equity-based government rights or interests in securities and equity mutual funds.
For equity transactions that are delivery-based, STT for purchase and sale is 0.1% of turnover and for intra-day transactions, STT for purchase is nil and sale is 0.025% of the turnover.
STT was an alternative tax mechanism when LTCG was exempt. However, it will continue to exist despite the reintroduction of LTCG, making India the only country where both the taxes co-exist.
Having STT and LTCG both unfair when former was levied expressly in lieu of latter…
— Aashish P Sommaiyaa (@AashishPS) February 1, 2018
STT was introduced in llieu of long term capital gain tax. It’s a pity that STT remains and LTCG tax is back. It’s okay to tax LTCG but STT should be removed.
— Nirmal Jain (@JainNirmal) February 1, 2018
Media reports suggest that the government collected Rs 8,358 crore from STT in FY17 while it collected Rs 7,350 crore from the same in FY16.
The budget also mentioned grandfathering in LTCG. What does that mean?
The grandfathering clause is the exemption granted to existing investors for gains made by them before the new tax law came into force. Gains made in equity-oriented mutual fund schemes till January 31, will be grandfathered or exempted.
What is the government’s reason for reintroducing LTCG?
“This regime (STT) is inherently biased against manufacturing and has encouraged diversion of investment to financial assets. It has also led to significant erosion in the tax base resulting in revenue loss. The problem has been further compounded by the abusive use of tax arbitrage opportunities created by these exemptions,” the CBDT has mentioned in a set of questions explaining the LTCG.
An article in The Hindu points that levying of LTCG will discourage the long-term holding of stocks in favour of short-term trading activity. The double LTCG-STT taxation will add to the burden.
Will LTCG tax allow tax indexation?
Tax indexing is the adjustment of various rates of taxation done in response to inflation and to avoid bracket creep. Bracket creep occurs when inflation drives income into higher tax brackets, which result in higher income taxes but no real increase in purchasing power.
The CBDT had said that the benefit of inflation indexation of the cost of acquisition would not be available for computing long-term capital gains under the new tax regime.
However, an article in Money Control says that sources informed CNBC-TV18 that indexation benefits are likely in LTCG tax.
Written by : Pooja Chaudhuri
Edited by :