Given that Dalal Street has been bleeding ever since Finance Minister Arun Jaitley announced long-term capital gains (LTCG) tax in his Budget speech four days ago, you'd expect investors to turn their backs on shares and equity-oriented mutual funds. The ongoing sell-off in equity markets - benchmark stock indices Sensex and Nifty today dropped up to 1.6 per cent in morning trade, continuing their decline for a third session on heavy profit booking by investors-only lends credence to that thought, right?
Wrong. To begin with, as Finance Secretary Hasmukh Adhia pointed out in a post-budget meet organised by CII today, the MSCI ACWI (All Country World Index) of equity markets went down by 3.4% in the past week and that was bound to have a ripple effect on Indian stock market. "It is not LTCG tax effect... Why should anybody do a distressed sell now? Because we have grandfathered, there is no hurry to sell," he added.
He is talking about the clause that Jaitley mentioned when reintroducing the LTCG tax on equity investments at 10% on profits in excess of Rs 1 lakh, if the assets are held for a minimum period of twelve months from the date of acquisition and if the Securities Transaction Tax (STT) is paid at the time of transfer. The grandfathered clause basically means that any gains from shares or equity mutual funds made till January 31, 2018 will be exempt from the proposed tax.
Moreover, as Pravin Rawal, Director of the Central Board of Direct Taxes, pointed out in his recently-released FAQ, the proposed tax will be levied only upon transfer of the long-term capital asset on or after April 1, 2018. In other words, if you sell all your shares or equity mutual fund units held for over a year on or before the last day of this fiscal, you can still claim tax exemption on long-term capital gains.
This explains why Rajat Jain, chief investment officer, Principal PNB AMC, is so confident that while LTCG tax will have a short-term sentimental impact, investors will adjust to this new tax regime "keeping in mind that equity investments have yielded good returns over the long-term". Also, as Adhia significantly pointed out today, the 10 per cent tax on LTCG is a "subsidised rate" as such gains on sale of unlisted scrips and immovable property are taxed at 20 per cent.
So how does one calculate long-term capital gains?
You just need to deduct the cost of acquisition from the full value of consideration on transfer of the long-term capital asset-or the selling price in layman's lingo. It is important to note that the benefit of inflation indexation of the cost of acquisition won't be available for computing long-term capital gains under the new tax regime.
The cost of acquisition will generally be the actual cost i.e. buying price of the asset. However, if the actual cost is less than its fair market value-the highest price of such share or unit quoted on a recognized stock exchange-as on January 31, 2018, the latter will be deemed to be the cost of acquisition. Further, if the full value of consideration on transfer is less than the fair market value, then such full value of consideration or the actual cost, whichever is higher, will be deemed to be the cost of acquisition. To illustrate this point, the CBDT has helpfully drawn up multiple scenarios:
Scenario 1: Let's say an equity share is acquired on January 1, 2017 at Rs 100. Its fair market value is Rs 200 on January 31, 2018 and it is sold on April 1, 2018 at Rs 250. As the actual cost of acquisition is less than the fair market value, the latter (Rs 200) will be taken as the cost of acquisition and the long-term capital gain will be Rs 50 [selling price minus cost of acquisition].
Scenario 2: If an equity share is acquired on January 1, 2017 at Rs 100 and its fair market value is Rs 200 on January 31, 2018 but it is sold on April 1, 2018 at Rs 150. In this case, the fair market value is not only higher than the actual cost of acquisition but it is also higher than the sale value. Accordingly the sale value of Rs 150 will be taken as the cost of acquisition, too, and the long-term capital gain will be NIL (Rs 150 minus Rs 150).
Scenario 3: Assume an equity share is acquired on January 1, 2017 at Rs 100 but its fair market value is lower at Rs 50 on January 31, 2018 and it is then sold on April 1, 2018 at Rs 150. In this case, since the actual cost of acquisition is higher than the fair market value, this will be the value used for calculating long-term capital gains. Hence, the taxable amount in this example is Rs 50 [selling price minus cost of acquisition].
The bottomline is that while the proposed LTCG tax in addition to the securities transaction tax (STT) is a double whammy for investors-especially since the STT was introduced back in 2004-05 in lieu of the LTCG-it does not entirely take the shine off markets. Currently no other investment option promises higher returns than equity.
Of course, Jaitley's move could see people rushing into Ulips to avoid the tax. "We believe against the given backdrop, life insurance products, particularly Ulips (unit-linked insurance plans) could appear relatively attractive from a medium- to long-term perspective," said Morgan Stanley. The investment bank's weekend note explained that taxation of insurance products is governed by Section 10d (of Income Tax Act), where the income is tax-free in the hand of the investor at the time of withdrawal, adding that "We await the Budget fine-print for further clarity, but if the above details are accurate, it should benefit private players like ICICI Prudential Life and HDFC Life".
But before you join the herd, keep in mind that Value Research, the most widely used source for opinion and data on Indian mutual funds, gives them a big thumbs down saying "Neither do they provide adequate insurance, nor a good investment solution".
With PTI inputs