Budget 2018 Proposal related to 10% LTCG on equity, its effect and expectations of stock market until March 31, 2018

The Finance Bill 2018 proposes to tax the long term capital gain (LTCG) on equity shares and equity mutual funds subject to STT @ 10% exceeding Rs. 1,00,000 from April 1, 2018.

The LTCG on equity has been exempt from tax since 2005. As per returns filed for A.Y. 17-18 (financial year 2016-17 alone), the total amount of exempted capital gains from listed shares and units is around Rs. 3,67,000 crores. So, there has been a strong case for bringing long term capital gains from listed equities in the tax net.

As a result, a fear among the equity investors have been brewing since last month that the tax on long term capital gain may come back. However, the market experts or advisors, including me, were confident that such a move could start selling frenzy and the Finance Minister would not make such a move in his last full budget.

However, all the fears came to reality when the Hon. Finance Minister, Mr. Arun Jaitely, in his budget speech, said “The return on investment in equity is already quite attractive even without tax exemption. There is therefore a strong case for bringing long term capital gains from listed equities in the tax net.”

Kudos to Hon. Finance Minister for grandfathering (allowing exemption of) the gains upto January 31, 2018.

Meaning:

For example, Mr. X invested Rs. 10,00,000 in an equity share or a unit of an equity mutual fund in March 2009 (sensex 8,500) and the market price of the share on January 31, 2018 is 50,00,000.

If Mr. X sells the investment on or before March 31, 2018, the new budget proposal will not be effective so any long term capital gain would be exempt from income tax in India.

If Mr. X sells the investment on or after April 1, 2018, the long term capital gain of Rs. 40,00,000 (value on January 31 of 50,00,000 less cost of acquisition of Rs. 10,00,000) would be grandfathered i.e. exempt from income tax.

As per the budget proposal, his cost would be the value on January 31, 2018 i.e. Rs. 50,00,000. However, his holding period would be counted from actual acquisition i.e. March 2009. If he sells the investment for Rs. 55,00,000, the long term capital gain would be Rs. 5,00,000 and he would have to pay tax @ 10% on the gain of Rs. 50,000.

My expectations of Stock Market until March 31, 2018

I would the stock market would remain flat (+- 1%) until year end, i.e. March 31, 2018, unless there is any structural issues or global threats, due to following reasons:

  1. The market will not go up significantly as thousands of investors are sitting on lakhs of crores of unrealized gain. As the budget proposal is effective from April 1, 2018, at any significant increase before March 31, investors will sell the equity to earn tax free return and save 10% tax on LTCG effective from next year.
  2. As the gain up to January 31,2018 would be exempt from tax, the market will also not go down significantly until March 31, 2018. The investors may not sell the shares at a price lower than January 31, 2018 price. This is assuming no structural issues or global threats, which is likely to be the case.

In summary, the market will not go up more than 1%. The market may go down but for reasons other than 10% LTCG tax proposed in the budget.

My Advice:

I think our Finance Minister has pulled a master stroke by introducing tax on LTCG and allowing exemption upto January 31, 2018. My advice would be

  1. Do NOT react without analyzing the effect of budget on your portfolio.
  2. There is no need to rush to sell the equity shares or redeem equity investments immediately.
  3. Consider capital gain, transaction costs and other factors for investments as where to invest, how to invest, how long to invest, when to sell and how much to sell could materially affect your tax liability and ultimately your after tax return. If you can’t do it yourself, consult an advisor or us.

About Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India)

Mr. Jigar specializes on NRI Investments and Taxation. He is proud to be one of only 21 CFA Charterholders in India working as consultants. (In 2011, when he became CFA Charterholder, out of 97,173 CFA Charterholders in the World, only 697 Charterholders were in India and only 3% work as consultant; Source: www.newcfa.org). He received his MBA (Finance) from University of Illinois, Chicago, USA, CPA from USA and a Chartered Accountant from India. Jigar has over 15 years of professional experience including more than 4 years with KPMG USA’s Risk Advisory Services. Currently, he provides Wealth Management and taxation consulting serving clients from USA, UK, Americas, Europe, Middle East, Asia, Africa, Australia and India.
This entry was posted in Income Tax, Investments in India, NRI Investments, NRI Taxation, Wealth Management and tagged , , , , , , . Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>