Zero tax on equity gain is on the way out

After the Prime Minister’s warning, it looks likely that long-term equity gain will be taxed. But it’s possible to save tax on older investments

So the Prime Minister has read the riot act to the financial markets. They’ll have to pay more tax out of the money they make, stop stealing on taxes if they’re doing that, and transform themselves into conduits for generating capital for growth rather than channels of speculation and investments. All unexceptionable goals, and hard to argue against.

However, that does not mean that those who are sitting on currently tax-free long-term capital gains (LTCG) are not worried about whether they will become liable for tax after the next budget.

Currently, gains from investments in listed equities and equity-based mutual funds are tax-free if those investments have been held for more than one year.

In his speech, the PM specifically said, “To some extent, the low contribution of taxes may also be because of the structure of our tax laws. Low or zero tax rate is given to certain types of financial income.”

As it happens, LTCG is the only type of markets-derived income which has a zero rate. Most investors will take this as a clear forewarning that this

LONGTERM CAPITAL GAINS IS THE ONLY TYPE OF MARKETSDERIVED INCOME WHICH HAS A ZERO RATE

privileged state may not last for long. Something roughly similar was done last budget when the qualifying period for longterm status for bond funds was increased from one to three years.

While tax will obviously have to be paid on gains made in the future after (if) the rules change, investors can definitely do something about long-term gains that they are sitting on right now.

They should sell such investments now and immediately buy them again. That way, they will book their profits at zero tax, making such gains safe from future tax changes.

There isn’t too much of a risk, because the worst that could happen is that the tax laws won’t change. In that case, you will have to wait for a year for your investments to turn long-term again, but you won’t lose on taxes.

As I’ve written in earlier years, this zero-tax status of LTCG has been living on borrowed time for a while now. Once this discussion starts, the status quo is hard to defend. It looks likely that the inevitable will happen this year. However, the PM’s warning may have given you a little opening to save the money you have already earned.