Impact of “ Long Term Capital Gains Tax” on Stock Markets
Tax on long term capital gains (LTCG) from the sale of equity shares or stock market earnings had been exempt (under section 10 (38) of the Income tax act, 1961) since 2004 (AY 2005-06).
Tax on long term capital gains (LTCG) from the sale of equity shares or stock market earnings had been exempt (under section 10 (38) of the Income tax act, 1961) since 2004 (AY 2005-06).
This section was reintroduced in 2018 (Assessment Year 2019-20) as section 112 A and is applicable to any transaction carried out after 1 April, 2018, at a tax rate of 10% on the gains (excluding surcharge and cess) due to long term equity shares, only if the gains exceeded ? 1 lakh/ year.
In 2018, unconfirmed news of re-introduction of LTCG tax on equity shares caused the shares of 3/4 th of companies listed in BSE 500 to fall by 10% or more, a day before the Union budget was presented.
Why are most traders reluctant for their long term capital gains earned from the stock market to be taxed?
Risk-Reward equation
- With the additional 10% tax, the risk-reward equation goes down for the stock traders as the business involves risk.
Security Transactions Tax
- The Security Transactions Tax or the STT came into existence from 1st October 2004, around the same time when LTCG on stocks was exempted from taxation.
- But in 2018, after the re-introduction of LTCG tax on the sale of company stocks, the STT was left untouched.
Multiple Taxation
First, the companies which sell stocks pay a corporation tax. The dividends that are paid back to equity investors are taxed at the source. Income on equities exceeding 10 lakh is taxed for gains above ? 10 lakhs. And finally, there is the STT.
Complicated Taxation & Filing Returns
- The returns have to be entered and calculated based on the FMV (fair market value)
- Starting from the latest budget, the traders have to fill in the ISIN/ Folio Number of the sold stocks and even require you to enter the PAN number of unlisted companies.
In the recent Union budget presented on 5 July, 2019 by the latest finance minister Ms. Nirmala Sitharaman, LTCG was not further burdened and 10% tax introduced last year was retained.
However, there is some relief. Reinvestment of income from the sale of house property to lessen tax burden can be invested to buy 2 new houses as opposed to only 1 house earlier, provided the gains do not exceed 2 crores.
LSI Keywords
Capital gains, Capital gains tax, LTCG, Long term capital gains tax, Short term capital gains tax, STCG, Risk-reward equation, STT, Security transactions tax, Multiple taxations, 10-year bond yields.
