Budget 2018: Equity Long Term Capital Gains (LTCG) Back with Grandfathering Provision!

Today, the Union Budget 2018 was presented, there were lot of expectations from the different sectors and people were also looking forward to the changes in the personal taxes, taxes on the equity and the factors leading to the economic growth. The most important thing that happened is a comeback of long term capital gain tax (LTCG) with grandfathering provision, introduction of tax on distributed income by equity oriented mutual fund, corporate tax cut to medium and small scale companies and others

Comeback of Long Term Capital Gain Tax (LTCG)

In line with our prediction, the government has announced that the Long term capital gain tax (LTCG) from sale of equity shares and equity mutual fund schemes will be taxed at 10% without indexation, if the total long term capital gain in an year crosses the INR 1 lakh threshold.

Further, the gains made on equity or equity related funds until January 31, 2018 to be grandfathered, which means that the gains that would arise after 31st January 2018 would only be considered for LTCG. There is no change made in the existing STT and short term capital gain tax regime on equity.

As expected, when the government announced the comeback of Long Term Capital Gain Tax, the market reacted negatively, but the market bounced back due to the grandfathering provision that the finance minister added to it.

What is Grandfathering Provision on LTCG?

Below is an example to simplify the grandfathering clause, if an investor had bought the share six months before 31st January, 2018 i.e. before 01^st Aug, 2017 at `INR 100/- and the highest price quoted on 31st January, 2018 is Rs. 120, there will be no tax up to Rs. 120 as selling price. However, if the investor sells that share after 31st July, 2018 and earn a profit of INR 50, then the long term capital gain on such transaction will be INR 30 (50-20).

Dividend Distribution Tax (DDT) on Equity Mutual Funds

In the Budget 20118, the government has also brought the dividend distribution tax (DDT) of 10% for equity oriented mutual funds. DDT is a tax that a fund house pays, from the distributive surplus, before it pays the investors dividend. The DDT will be borne by all investors, investing in the equity-oriented mutual funds. This was done with an objective level returns on dividend and growth oriented funds.

Finance Minister @ArunJaitley talks about Securities Transaction Tax (STT) and Indian economy#NewIndiaBudget #BudgetWithDDNews pic.twitter.com/Sj6AqImoWL

— Doordarshan News (@DDNewsLive) February 1, 2018

Overall, the Budget 2018 marked the introduction of DDT and the comeback of LTCG. The market would have taken negatively if the profits before 31^st January would have been considered.  Further, the retail investors will not be affected much. Firstly due to the fact that the capital gain more than 1 lakh will be taxed and secondly, as per returns filed for A.Y.17-18, the total amount of exempted capital gains from listed shares and units is around `3,67,000 crores and the major portion of this gain had accrued to corporates and LLPs.