Investor’s Query: One important factor effecting personal investment in this budget towards equity;
- The mutual funds shall be liable to deduct 10% on any income being distributed from equity-oriented funds.
- Long-term capital gains @ 10% will be applicable on capital gains exceeding Rs 100,000/- upon sale of equity share or units of equity oriented funds or unit of business trust etc. However, the gains till 31-Jan-2018 are being grand fathered i.e. only gains over 31-Jan-2018 prices will be taxed.
Need your clarification on this clause people are of the opinion that, they will SELL all their existing equity investments now and reinvest in April 2018 onwards to save themselves from paying LTCG Tax! They think that the sale of equity and paying LTCG tax is NOT applicable up to 31-03-2018!
Mr. Gerard Colaco: The union budget, insofar as its tax provisions are concerned, tables a finance bill before the Lok Sabha, proposing various amendments to the Finance Act. When these amendments are finally passed and the amended Finance Act becomes law, the tax proposals will affect only the financial year that follows the one in which the budget was announced. So, the tax proposals of budget 2018 are applicable only to FY 2018-19, and beyond.
In other words, if an equity share or unit of an equity mutual fund (held for more than a year) is sold during the financial year 2017-18, such sales will be totally exempt from long-term capital gains. STT will of course be charged. The new tax provisions will kick in only for sales executed on or after 1st April 2018.
Obviously, such a provision would have resulted in investors across the country selling shares in huge quantities in order to book tax-free LTCG. The finance minister took two steps to prevent or reduce this.
First, the cost of acquisition of a long-term capital asset acquired before 1st February 2018 shall be either the actual cost of the asset or the fair market value of the asset, whichever is higher.
Fair market value in case of stocks, is the highest price quoted for the stock on 31st January 2018. This is to give investors a chance to avail of a higher cost of acquisition when calculating LTCG for sales in FY 2018-19.
Second, a lot of investors who bought shares or mutual funds decades ago, have absolutely no idea about their original cost of acquisition. Neither do they have records to support the same. The fair market value option greatly mitigates the ordeal of determining the actual purchase price of such old financial assets.
Giving investors the option of a relatively high deemed cost of acquisition and a mechanism by which they don’t have to worry about the original cost of acquisition is called “grandfathering”.
People who have raised the queries are right when they say that all sales up to 31st March 2018 will be exempt from LTCG tax. But they are wrong in their strategy of selling in FY 2017-18 and repurchasing in FY 2018-19. There is no need to do this. The grandfathering provisions have already protected them.
The following are the few major proposals impact individuals and personal investing in this budget;
- Salaried tax payers: Standard deduction of Rs. 40,000/- in lieu of transport and medical expenses.
- Long Term Capital Gains (LTCG) exceeding Rs 1,00,000/- on investments in equity and equity oriented funds to be taxed @10% without benefit of indexation.
All gains till January 31, 2018 will be grandfathered. For example: If an equity share is purchased before January 31, 2018 at Rs. 100/- and the price on January 31, 2018 is Rs. 120/-, there will be NO LTCG tax on gains of Rs. 20/- if the share is sold after one year of purchase. However, any long-term capital gain in excess of Rs. 20/- earned after January 31, 2018 will be taxed at 10% (applicable on long-term capital gains exceeding Rs. 1,00,000/-).
- Tax on distributed income by equity-oriented mutual funds levied at 10%.
- Senior Citizen Incentives: Exemption on interest income on FDs/Post office deposit increased from Rs. 10,000/- to Rs. 50,000/-. Raising tax deduction limit for health insurance from Rs. 30,000/- to Rs. 50,000/-.