In this year’s union budget, the decision was made to begin imposing 10% tax on capital gains of over ₹1 lakh made on any investment in listed equities or mutual funds with a holding period of over a year. Long-term capital gains tax (LTCG) on equities was abolished in 2004-05, but now it seems to be a hasty move to taper the widening fiscal deficit ahead of an election year.
Capital Gains Tax for 2018-19
The investors in equities have benefited from sharp returns over the last few years and thus have become targets for the government to earn additional revenue. Following this premise, the sharp fall in both the Nifty and the Sensex after Finance Minister Arun Jaitley’s speech can be linked to this change of taxation.
If capital gains taxation is new to you, here’s a brief on this concept.
So, why capital gains tax? The answer lies in the source of income. Any profit from the sale of a capital asset is termed capital gains. A capital asset is officially defined as any kind of property held by an assessee, excluding goods held in the form of stock-in-trade, agricultural land, and personal effects.
Also, no capital gain is applicable on a gifted or inherited property as these are specifically excluded from tax liability as defined in the Income Tax Act.
Normally, the assets owned by you do not give a regular income by way of interest or dividend but deliver returns through price appreciation on the asset, you stand to make a huge profit if you sell them.
Capital gains tax is designed to ensure that such profits do not escape the tax net.
Usually, if an asset is held for less than 36 months, any gain obtained from selling it is considered as a short-term capital gain (STCG) and taxed accordingly. It becomes a long-term capital gain (LTCG) if the asset is held for 36 months or more.
However, shares and equity mutual funds enjoy a special taxation procedure in capital gains tax. In this case, a holding period of 12 months or more qualifies as ‘long-term’.
Capital gain is a profit on the sale of capital assets, i.e., those assets not held for sale in the ordinary course of business. As tax rates are often much lower for capital gains than for ordinary income, there is controversy about the proper definition of capital.
One obvious concern with this new tax is whether raising the tax burden on equities, rather than reducing the tax and other barriers to investing in other assets, is the right way to address the complex effect of taxes. While this can provide liquidity and add to the government’s revenue, it may also discourage, up to an extent, the fostering environment of investing in equities in the long run.