Govt brings back LTCG tax on investments

MUMBAI: TO ENSURE INVESTORS DON’T SWITCH TO DIVIDEND PLANS IN ORDER TO ESCAPE PAYING THE NEW 10% TAX, BUDGET HAS ALSO INTRODUCED DIVIDEND DISTRIBUTION TAX OF 10% FOR MUTUAL FUND

The long-term capital gains tax, or LTCG tax, is back. Presenting the Union Budget 2018, finance minister Arun Jaitley said LTCG from sale of equity shares and equity mutual fund schemes will now be taxed at 10%, if your total capital gains in a year cross ₹1 lakh. Below ₹1 lakh, gains won’t be taxed.

Currently, there is no LTCG tax if you sell your shares or equity mutual fund units after holding them for a year.

Under the budget proposal, the threshold for long-term capital gains, though, will continue to be a year.

The securities transaction tax (STT) of 0.001% that unitholders of mutual funds pay at the time of selling and the STT paid at the time of buying and selling of direct equity shares (0.1% paid both at the time of buying as well as selling) will continue.

“The STT was introduced in place of capital gains tax was removed many years ago. Now that the capital gains tax has been brought back in, the STT still remains,” said Gautam Nayak, partner, CNK & Associates LLP, a tax firm.

In 2004, the government abolished long-term capital gains tax on equities held over a year, and introduced the STT in its place.

A bit of good news in this proposal is that the finance minister has allowed exemption of the gains that would have arisen up until 31 January 2018.

Only the gains that would arise after 31 January 2018 would be considered.

“In view of grandfathering, this change in capital gain tax will bring marginal revenue gain of about ₹20,000 crores in the first year. The revenues in subsequent years may be more,” Jaitley said in his speech.

To ensure that investors don’t switch to dividend plans, in order to escape paying the new 10% LTCG tax, Budget 2018 has also introduced the dividend distribution tax (DTT) of 10% for mutual fund. This is a tax that a fund house pays—from the distributable surplus—before it pays the dividend. Curiously, while the 10% LTCG tax is meant for only those investors whose cumulative capital gains is in excess of ~1 lakh, the DTT will be borne by all investors of equity-oriented mutual funds.