Long-term capital gains tax (LTCG)

What is long-term capital gains (LTCG) tax?

It is the tax paid on revenue generated by an asset such as real estate, shares or share-oriented products held for a longer time than 12 months before it was sold. The definition of Long-term Capital Gains, or LTCG, is different for various products.

What is the budget proposal of LTCG

Finance Minister Arun Jaitley, in his Union Budget speech, re-introduced LTCG tax on stocks. Investors will need to pay 10 % if the gains exceed Rs 1 lakh per annum without allowing the benefit of indexation. However, all gains until 31st January 2018 is going to be grandfathered and also short-term capital gains remain unchanged at 15 %.

Let us see an example below:

example of new LTCG

Image courtesy of Economictimes

What is grandfathering in LTCG?

While this new LTCG law came as a strike to investors, the blow was softened by the Grandfather clause to protect existing investors. The ‘grandfathering’ clause is the exemption granted to existing investors or gains made by them before the new tax law comes into force. Under this clause, the price of the security on January 31, 2018, is the benchmark date. There will be no LTCG tax on notional profit in shares till then.

Benefit from new revised LTCG

Potentially, investors can sell gains amounting to Rs 1 lakh and below and repurchase it immediately. This sell-buy approach can be timed such that any net loss on the transaction is lesser than the LTCG tax.

On the other hand, the long-term investors would maintain their positions, awaiting favorable exit positions in terms of gains or tax regimes.

Looking at the positive side, the LTCG tax will certainly avoid irrational exuberance and bubbles building in the market because of huge capital flows. From the long-term perspective, LTCG tax is not a major dampener. Equity has delivered more than 15 % CAGR in the course of the last 38 years. Even though it comes down to 13.5 percent after 10 % LTCG, it is far more attractive as compared to all other asset classes in the long run.