As a long-term investor, I was worried a little bit about long-term capital gains tax 2018 before Union Budget that has been announced on 1st Feb 2018. Many analysts and investors are also expecting that something related to LTCG might be there in the budget. When Finance Minister, Mr. Arun Jaitley spoke about LTCG, then market react negatively as Government of India re-introduced and imposed 10% long-term capital gains tax 2018.
LTCG is back in D-Street and it will certainly shrink your profit margin. Although, stock market digest the 10% tax on gain above 1 Lakh because of grandfathering of your gains till 31st January 2018. However, D-Street surprise to see that there is no change in Securities Transaction Tax (STT). In fact, STT was introduced in place of long-term capital gain tax 2018.
Long-Term Capital Gains Tax 2018: Shrinking Profit Margin
For the time being, let’s calculate LTCG on your income from investment. From 1st April 2018, you need to pay 10% tax if you make a profit above 1 lakh on the sale of equity shares. However, if you have already invested then you are exempt from tax on capital gains until 31st January 2018.
Suppose you have bought some X company shares at Rs.1000 on 15th November 2017 and sold them on 20th October 2018 at Rs. 1200. However, the value of the X share price was Rs. 1100 as on 31st January 2018. So basically, you have earned a profit of Rs. 200 on each share. But the value of shares gained by Rs. 100 as on 31st January 2018.
Buying Price = 1000
Selling Price = 1200
Actual Gains = 1200-1000 = 200
Gains as on 31st Jan 2018 = 1100
LTCG on Gains as on 31st Jan 2018 = 1100-1000 = 100
So you need to pay long-term capital gains tax 2018 on Rs. 100 only and not on Rs. 200. So, if your stock moves upward and gains in excess of Rs. 100 after 31st Jan 2018, then you need to pay 10% tax on the gains. Because of LTCG, STT, and other taxes will bring down your profit margin hugely.
Furthermore, LTCG tax is applicable only if you have made profits above Rs. 1 lakh in a financial year. So, if you made long-term gains on your investment of Rs. 175,000 in a year, then you need to pay LTCG tax on Rs. 75,000 only. Up to Rs. 1 lakh, LTCG tax is exempted in a financial year.
As a retail investor, you may be taking the burden of Securities Transaction Tax. Now you need to bear the huge burden of long-term capital gains tax also. Short-term capital gains tax of 15% is already making a hole in your pocket and day trading is too much riskier for you. Most of the stock market participant, investors, and analysts feel that it is a negative for Indian equity market.
I hope you will get some idea of how LTCG will be calculated and how it impacts your earning as well. I suggest you check with your financial advisor or tax planner to avoid any confusion. However, you can comment below to know more about LTCG and also express your views.
Last updated: Feb 7, 2018