You work very hard to earn your salary. Unfortunately the Government taxes the salary you earn, if it exceeds a particular limit. You earn rental income by giving your apartment on rent. You have to pay tax on this rental income. Any income you earn…well the Government taxes it….. You invest your money in a fixed deposit…if the interest you earn exceeds a particular amount, you are taxed.
You buy a house (apartment) and sell it for a profit (higher price). This profit is called capital gain. You have to pay tax on your capital gain. This tax is called a capital gains tax. You have to pay capital gains tax, not only on the house or an apartment you sell for a profit, but also on gold and mutual funds. The Government does not want you to invest your money in a safe financial instrument, such as a fixed deposit. The Government wants you to invest in a risky financial instrument such as an equity mutual fund or even in stocks. This would help create jobs and boost the economy. The Government taxes you at a lower rate, if you invest in risky financial instruments, such as equity mutual funds.
If you stay invested in equity (stocks and equity mutual funds) for over a year, the gains or the profit you make, are called long term capital gains. You do not have to pay any tax on these long term capital gains, provided you have paid STT (Security Transaction Tax). The dividends you earn from stocks and equity mutual funds, are tax free. The Government has made this rule so that you and other retail investors, invest your money in equity. You and other investors in equity have been having a great time.... Perhaps for too long...
The Problem….. The Government might increase the holding period to get the benefit of long term capital gains tax exemption on equity, from 1 year to 3 years. This means you would have to stay invested in equity, not for 1 year but for 3 years, to get the benefit of long term capital gains tax exemption. There is also a chance that the Government might reimpose, long term capital gains tax on equity.
The Government believes that long term capital gains tax exemption on equity, favors the rich. The Government believes it is subsidizing the rich and the HNI’s, who can and should be paying the long term capital gains tax. Dividends and long term capital gains on stocks, which are traded on stock exchanges, are earned by the rich and not by the poor. There is no long term capital gains tax exemption on long term capital gains in equity, even in rich countries like USA and the UK. Seems a fair argument…..
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