Budget 2018: LTCG from equities can't run for cover not even take shelter under NHAI bonds

The direct taxes code (DTC) the former finance minister P Chidambaram was obsessed with during the UPA I swore by a salutary principle, income is income and no favor would be shown to Long Term Capital Gains (LTCG), or for that matter any income at all. Finance Minister Arun Jaitley has partially walked the talk of his predecessor perhaps in keeping with another salutary parliamentary principle that government is a continuum and normally has to honor the commitment made by the previous government. Partially because the favored treatment to listed equity shares continues as follows:

One, on short term capital gains earned by selling shares in a recognised stock exchange the tax rate would be a flat 15 percent provided securities transactions tax (STT) were paid both at the time of purchase and at the time of sale. Second, on long term capital gains earned by selling shares in a recognised stock exchange the first Rs 1 lakh would be exempt including the formidable FIIs now called FPIs, with the remaining amount being taxed at 10 percent flat. For this purpose the appreciation in stock values post 31 January, 2018 alone would be considered. Again STT should have been paid both on purchase and sale in the exchange.

Representational image. Getty Images.

Representational image. Getty Images.

Jaitley could have made a wholesale switch to all-income-are-equal credo professed by the DTC but he somehow feels the need for humoring the stock market by taxing STCG and LTCG there from at concessional rates of 15 percent and 10 percent respectively. Be that as it may but as he is happy with what he has done and says the tax of around Rs 33,000 crore he is dreaming of garnering from LTCG on equities would be enough to bankroll the ambitious Ayushman Bharat Yojana as well as taking care of the 50 percent profit on cost promise to the farmers.

He has fool-proofed the new levy by making it clear that section 54EC benefit would not be available from LTCG on equities. This he has done by making an amendment in that section saying that come 1 April 2018, only LTCG from land and buildings would be able to partake in the benefits offered by the section. Further, section 80C deduction, indeed any deduction under chapter VIA starting with the prefix 80, would not be available to the extent the gross total income of a person includes LTCG from equities.

However individuals and HUFs can save the 10 percent tax on LTCG from equities by investing the sale proceeds in a residential house in terms of section 54F. This shelter is not available for corporates and financial institutions. But even individuals and HUFs would find section 54F difficult because unlike NHAI/REC bond, residential properties are illiquid and cost considerable sums.

In the event, one can possibly avail of the section 54F benefit by ploughing back the sale proceeds from the stock market into a residential house once in his lifetime. The long and the short of the above discussion is the exchequer is going to collect a 10 percent tax on LTCG from equities from individuals, corporates and institutions. FIIs as well as domestic financial institutions like LIC too will have to cough up the 10 percent tax on LTCG from equity in excess of Rs 1 lakh. A possible exception would be in case of individuals/HUF who do not have taxable income from other sources.

An example is in order. Let us say a senior citizen has LTCG from equity of Rs 10 lakh. The first Rs 1 lakh would be insulated from the 10 percent tax. But since he has no other source of income, another Rs 3 lakh (the tax-free limit for senior citizens) would also be insulated from the 10 percent tax, leaving Rs 6 lakh the LTCG liable to the 10 percent tax.

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Updated Date: Feb 05, 2018 09:51 AM

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