LTCG tax on equities is not going anywhere: Government’s clear message in Parliament Investors were speculative about possibility of abolishing LTCG tax on equities and a definitive answer has come in the Parliament from the government as it made it clear that there is no proposal to abolish long-term capital gains (LTCG) tax on equity investments at present. This comes when stock market participants were anticipating some move on the changes in the capital gains tax regime in the country.
Government Says No Proposal to Scrap LTCG Tax on Domestic Equity The Ministry of Finance stated unequivocally that it does not have any plan to scrap the LTCG tax on domestic equity investments. Thus, investors on the listed equity shares and equity-oriented mutual funds shall be required to adhere to the same long-term capital gains tax rules and regulations of the country.
Long-term capital gains on listed equity shares and equity mutual funds have a tax liability of 12.5%, according to existing rules, and apply after consideration of an exemption threshold to long-term holdings. This clarification of the Centre has been given in a scenario when there were several rumours floating in the market about removal or modification in the LTCG tax on equities to make the Indian stock markets attractive for more investors.
What is LTCG Tax on Equity Investments?
Long-Term Capital Gains (LTCG) tax is imposed on the profits or gains earned by investors when they sell investments such as listed shares or equity-oriented mutual funds after holding them for a specific period. The time threshold for a long-term holding period is generally more than 12 months for listed equities and equity-oriented mutual funds.
For example, if an investor buys equity shares for 5 lakh and sells them after one year for 7 lakh, then the gains of 2 lakh would qualify as long-term capital gains.
A portion of these gains is taxable after accounting for permitted exemption limits. These tax rules were modified significantly a couple of years back, when the LTCG tax on eligible equity shares was introduced at a flat rate of 12.5% with a prescribed exemption threshold.
Why Investors Were Expecting a Possible Change
The government is still facing the argument on the LTCG tax on equities with experts and market participants often highlighting the need to lower it further, as it can encourage investment and make India equity markets more appealing. Many investors, especially those trading on margin, worry that such a tax might discourage taking long-term positions. However, this clearly indicates that the government is not planning to reduce or waive the tax currently. The government, being a major source of revenue, benefits from capital gains tax collection and according to a recent news, LTCG on equities contributed as much as 4.85 trillion to government coffers last fiscal year.
What Does This Mean for Stock Market Investors?
The government’s statement has eliminated any doubts on the front of getting any relief in terms of LTCG tax on equities for now. So, any investor making plans to sell equities with substantial long-term gains will have to ensure that 12.5% LTCG tax is factored in before making an exit from the market.
Investors would be better off by planning their investment portfolios by focusing on their long-term investment horizons, Asset Allocation, diversification strategies and risk tolerance rather than focusing solely on tax changes.
Building a long-term strategy on any hope of potential change in the capital gains tax policy would be a futile exercise.
LTCG Tax and STCG Tax: Key Difference
For an investor who sell the equity holdings within one year, then it would attract short-term capital gains (STCG) tax which is levied at 20% with respect to profits. For long-term holdings that exceed the specified period (12 months in this case for equities), then they fall under long-term capital gains tax. For these, the tax liability is 12.5% with exemptions.
No LTCG Tax Scrapping But Changes Remain Possible In the coming Budgets and beyond, it is always possible that a government might revise its policies related to capital gains tax but any investor must ensure they get their information from reliable sources rather than rumors or social media posts. Given that capital gains are a significant contributor to government revenues, it might be unlikely that they would be eliminated. For the time being, the path is quite clear- LTCG on equity is not going to be scrapped.
Conclusion
The government has made its position clear that there are no immediate plans to remove the LTCG tax on equity investments. The 12.5% rate of LTCG tax will continue to apply to eligible long-term equity holdings, so investors must continue to factor in this aspect when planning their investment portfolios. For most retail investors, the recent clarification is important because tax policy alone should not be the determining factor for making any buy/sell decision for shares. They should make it a part of a larger strategy based on a clear investment vision, appropriate diversification and an in-depth understanding of the applicable tax laws.
