The Union Budget 2018-19 is just a month away. Once again there's talk of the Finance Minister Arun Jaitley, imposing long-term capital gains tax (LTCG), on equities. As you know, if you stay invested in shares and equity mutual funds for a year or more, LTCG tax is zero.
Just last year on 24th December 2016, PM Narendra Modi made a speech saying, "those who profit from financial markets must make a fair contribution to nation-building through taxes. For various reasons, the contribution of tax from those who make money on the markets has been low."
Only equities enjoys zero long-term capital gains tax and it was widely believed, that a tax on long-term capital gains was soon coming. A zero long term capital gains tax on equities benefits only the rich, (Just 2-3% of our citizens invest in equity), and PM Modi wanted to get rid of this unfair benefit. Strangely, an LTCG Tax on equities was never imposed.
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Finance Minister Arun Jaitley pegged the fiscal deficit at 3.2% of GDP for 2017-18. Fiscal deficit is the total revenue of the Government - the total expenditure of the Government. Unfortunately, the fiscal deficit at the end of October 2017, hit 96% of the set (estimated) value.
This was because of higher Government expenditure and lower revenue. Clearly, the Government needs revenue from somewhere. So, is long-term capital gains tax on equity coming?
If you stay invested in equities (equity mutual funds & stocks) for a year or more, your gains/profits are called long-term capital gains (LTCG). LTCG is tax free and has been so since 2005. Tax on LTCG was abolished to encourage foreign investors to invest in the Indian stock markets.
After demonetization, banks cut FD rates and the Government slashed interest rates on small saving schemes like PPF, NSC and others. You and other citizens rushed to invest in equity mutual funds and shares, with the hope of earning higher returns.
If you stay invested in equities for less than a year, your gains are called short-term capital gains (STCG). STCG is added to your taxable income and taxed as per the income tax bracket you fall under. As investors rushed to invest in equities, they decided to stay invested for at least a year, to enjoy the benefits of zero tax on LTCG.
So what happens if LTCG Tax is introduced? You and other investors would lose confidence in equities and look for alternative investments. This is a time when investors are rushing to invest in equities. So why drive them away?
The Government badly wants to increase revenue. Stock markets have been doing well and what better way to increase revenue than taxing LTCG on equities? LTCG Tax on equities will give the Government massive revenues and make tax avoidance via equities, difficult.
As you and other investors invest heavily in equities, the Government is not worried about investors exiting stock markets, if an LTCG Tax is imposed. Yes, foreign investors may hesitate to invest in Indian stock markets. But today, the stock markets are driven by Indian investors and not foreign investors.
SEE ALSO: Should You Invest in Bharat 22 ETF?
LTCG tax on equities will curb speculation. If you simply invest in equities without doing your research, hoping for a profit or a gain, this is speculation. If the Government imposes say a 15% LTCG Tax on equities, you and other speculative investors would think twice, before making investments in equities. You would be forced to invest for the long run.
So what do investment experts have to say? An investment in equities rewards long term investors. You get good returns if you stay invested in equities for at least 3 years and ideally between 3-5 years.
Investment experts believe, the holding period for long term capital gains exemption must be increased, from one year to three years. Don't you think this is a good idea?
Finance Minister Arun Jaitley will present the Union Budget 2018-19 on February 1st 2018. It is highly unlikely that LTCG on equities will be taxed. But....You never know...Don't be surprised if you see an LTCG tax on equities. Be Wise, Get Rich.
Mr C.S.Sudheer is a management graduate. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.
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