Rationalisation of long term capital gains proposed

Revenue gain of about ₹ 20,000 crores expected in the first year

The Union Finance and Corporate Affairs Minister Shri Arun Jaitley  today proposed to tax long term capital gains exceeding ₹ 1 lakh at the rate of 10% without allowing the benefit of any indexation. Presenting the General Budget 2018-19 in Parliament here today, Shri Jaitley said that all gains up to 31st January, 2018 will be grandfathered. Recognising that a vibrant equity market is essential for economic growth, Shri Jaitley proposed only a modest change in the present regime.

The Finance Minister also proposed to introduce a tax on distributed income by equity oriented mutual fund at the rate of 10% to provide level playing field across growth-oriented funds and dividend distributing funds. He elaborated that in view of grandfathering, this change in capital gain tax will bring marginal revenue gain of about ₹ 20,000 crores in the first year 2018-19. The revenues in subsequent years may be more.

The Finance Minister Shri Jaitley added that currently, Long Term Capital Gains arising from transfer of listed equity shares, units of equity oriented fund and unit of a business trust are exempt from tax. With the reforms introduced by the Government and incentives given so far, the equity market has become buoyant. “The total amount of exempted capital gains from listed shares and units is around ₹ 3,67,000 crores as per returns filed for A.Y.17-18. Major part of this gain has accrued to Corporates and Limited Liability Partnerships (LLPs). This has also created a bias against manufacturing, leading to more business surpluses being invested in financial assets. The return on investment in equity is already quite attractive even without tax exemption. There is therefore a strong case for bringing Long Term Capital Gains from listed equities in the tax net” the Minister explained.

Long term capital gains tax introduced at a fixed rate, grandfathering existing gains and taxing fund distributions. Proposal to tax Long Term Capital Gains on listed equity shares, units of equity-oriented funds and business trust units above a specified exemption threshold at 10% without indexation, with gains up to 31 January 2018 grandfathered; and to impose a 10% tax on distributed income of equity-oriented mutual funds to equalise treatment between growth and dividend funds, justified by revenue broadening and removal of a bias favoring financial asset investment.