Rationalisation of Long Term Capital Gains Tax Rate at 10% (Budget 2018)

Rationalisation of Long Term Capital Gains  Tax Rate at 10% (Budget 2018)

While presenting Budget 2018-19, the Finance Minister Mr Arun Jaitley has proposed to Rationalise Tax Rate for Long Term Capital Gains at 10%, i.e. to tax long term capital gains exceeding Rs.1 lakh at the rate of 10% without allowing the benefit of any indexation. Further, he stated that all gains up to 31 Jan. 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 Rs.20,000 crores in the first year 2018-19. The revenues in subsequent years may be more.

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 Rs. 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 Finance Minister explained.

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