Your interpretation seems right. Putting different values in https://www.incometaxindia.gov.in/pages/tools/income-tax-calculator.aspx one can verify.
Clarification by a tax practitioner/partner on LTCG:
What is the budget proposal on LTCG for equities?
Ans – So far, any LT Capital gains made on equities on Exchanges was exempt. The Govt has now proposed an 10% LTCG tax on gains made above Rs 1 Lakh
When is the tax payable?
Ans – Since it is a Direct Tax proposal it will normally be applicable for the Assessment Year FY19-20 (Financial Year FY18-19). In other words, the LT Capital gains, of over Rs 1 Lakh, made for the year FY18-19 will be liable to tax at 10%.
Does it mean that there is no LTCG for Assessment Year FY18-19 (Financial Year FY17-18)?
Ans – One needs to understand the exact proposal in fine print. However, it appears that any LTCG will not be applicable for FY18-19 on plain read. This question frankly needs greater degree of expert study.
What is the relevance of the cut-off date of 31st Jan 2018?
Ans – The FM has proposed grandfathering of LT Capital gains upto 31st Jan 2018. Any incremental LT Capital gains after that will be counted as LT Capital gains for the new tax.
What happens to my tax liability if I sell stocks starting today held for more than a year?
Ans – As for LT Capital gains made in Financial Year 17-18 (i.e sale upto 31st Mar 2018), it appears there is no tax. However, any sale made after 1st April 2018 will be liable to the new LTCG tax. One needs to segregate this LT capital gain into two parts
a) Part one – is LT Capital gains made upto 31st Jan 2018. This will be highest price of the stock on 31st Jan 2018 minus the cost of acquiring stock;
b) Part two – is LT Capital gains made after 31st Jan 2018. This will be sale price minus highest price of the stock on 31st Jan 2018.
While Part one will be exempt. It is the Part two that will be assessed as LT Capital gains (it can also be a Capital loss) for Tax. Tax on this will be computed at the rate of 10% (+ cess of 3%) only if exceeds Rs 1 Lakh
What should be the strategy now on equity investments?
Ans – Any equity investor wishing to reduce the LT Capital gains tax liability can sell stocks starting today till 31st March 2018 and incur zero tax provided the holding period is more than a year. However, one can continue to buy equity shares without any hesitation. Any future sales after 31st March 2018 has to be judiciously chosen to minimize the tax liability. Assuming equity investments yield a return of 15% every year, an investment of Rs6.66L each year will rise to Rs7.66L in a year and gains booked thereof will be tax free. Even if the gains exceed 15% to say 25%, the LT gains Tax will be Rs6,667/- only
Don’t you think it is a double taxation?
we as investor holding a business or part of it…so already the company profits are taxed…and again we need to be taxed?
LTCG does it mean , For all the previous years accumulated profit will be zero for taxation purposes , and the base date for calculation will be 31/jan/2018 rate ? So govt will get tax only if markets /share prices go up from here on .
So Lets say, I have made good profit till jan 31st and the price goes down in feb. Can I sell my shares, claim a loss for ltcg and carry it forward while still being in profit? This will make next years tax burden lesser?
The proposals made in the budget will come into force only from the next financial year. For now, it is only a proposal. The finance bill has to be approved and only then it becomes Finance Act. LTCG tax will only apply on sale made on or after April 1, 2018.
Yes, thats correct. The LTCG clause is effective assessment year 2019-2020 just that for computation of gain/loss for stocks sold in FY 18/19, the purchase date will be considered as Jan 31, 2018 for the ones exceeding the 12-month holding period.
No, the 31st jan marker is only a one-off lenience - so that you are not charged ltcg retrospectively. As long as your sell price is above your buy price, you are still in profits! But we need to know if real short term losses can be offset against the ltcg gains.
I get a lot of stick when I give my opinions about higher taxes to my friends and relatives. I am used to it. Some people make ‘paying 10% tax on incremental income (not your salary but incremental income)’ sound like a lot of hard work. Trust me it isn’t. I would just like to give you a few analogies here.
Rich dad Poor Dad
A person born in a well to do family does not have to worry about accumulating funds for education, food & healthcare. He/she has the priviledge of choosing the profession of their choice and not worry about ‘settling’ in life. On the other hand a person born in a poor family has to struggle to get educated, build a house, pay for the education of their children, get them married & settled in life etc.
In India, you are born in a country which was until ~70 years back someone else’s colony. Literacy rate was abysmally low, poverty & disease rampant. Situation has improved. But being born in India is analogous to being born to a lower income family. India still has miles to go on human development indices, infrastructure etc. You don’t have the luxury to enjoy the benefits of having a rich father. Maybe our next generation will begin enjoying those benefits, but not us.
Haves have to help have nots
To have a sustainable development, and to develop regions which will become consumers of the future, the well performing regions/states have to help out the backward states. The states who earn the most revenue - Maharashtra, Gujarat, TN, Karnataka etc have to support the development of states which are lagging behind like Bihar, UP, Orissa etc (No offence meant to natives of these states). So the central government’s major share of monetary help goes to the backward states even though the majority of the income (via indirect & direct taxes) is earned by the more developed states Maharashtra, Delhi Pay 53% Of India’s Income Tax. If you don’t do this you will have a situation where there is a deep income divide between regions. You are then likely to end in a civil war. See the situation in some African countries which seem to be stuck in a vicious cycle of civil war & military coups.
Similary, more than 50% of India’s population is dependent on agriculture and allied activities (source http://censusindia.gov.in/. Agricultural incomes are very uncertain (due to varying prices & uncertain rainfall). A farmer never has a good visibility for his income 6 months down the line. Disease, poor rainfall etc some times means he has to suffer a loss, which he may not be able to digest. If the government doesn’t bail them out, you end up with a large disgruntled population. A situation which may lead to a civil war (Maoist movement is one such manifestation of large divide in income/development).
If you pay tax you are priviledged
You may not have realized it but if you are paying income tax you a part of the small section of population which is:
- Has steady income & visibility for the near future
- Luxury of investing in financial instruments (I assume you would only invest after meeting all the needs of your family)
Paying tax may sound like a lot of hard work. But it isn’t. Its the easiest way to make some contribution to help the backward sections of the society. And you should since you are privileged enough.
Consider yourself lucky
You are living in India, which is:
- Politically Stable - ask Pakistan, Syria, some African countries (reeling from civil war)
- Growing economy - Ask Europeans or Americans or the Japanese about the value of an economy which grows at 7%
- Enjoy more freedoms than majority of world population - China, middle east, Africa
This inspite of having gained independence only 70 years back. Want to continue enjoying these benefits? Then you have to cough up $$$. There is no such thing as free lunch.
You are born to a poor father and have to help out in earning a livelihood for your family. Contribute towards the education of your siblings. Unless you want a fight to break out within your family, potentially ruining all the progress made by your father. Solution - pay some portion of your income to your siblings.
If all our taxes had been channelized to the needy groups of the society, we wouldn’t have been facing the fundamental problems we face in our country today. Having a populist budget with dole outs to poor and high taxation levied on middle-income group has been a decades-old strategy, employed by political groups to win brownie votes in election years. Else why is the divide between the haves and have nots, instead of reducing, keeps growing by the year? Because that’s how most politicians want it to be! (Not just in India). No offense to anyone’s sentiments and neither do I wish to initiate a debate on BJP Vs Congress here, but I have my reservations to being subjected to ‘frequent and high’ taxation by governments who have a history of misappropriation of funds and bad implementation of policies. I would rather prefer to find better ways of using my funds to serve the society.
By the way, why not let these politicians first introduce a parliamentary bill on performance linked incentives and retirement policies in politics before appointing themselves for chalking the destiny of a nation (instead of serving, for which supposedly they were meant for)
As I said, no offense to anyone. Views are personal.
Yes there was a bill which passed today. The dummies(Prez and Vice. Prez) to pocket lakhs of salaries for doing absolutely nothing. Such a stupidity that is.
As many stated the middle-class are the one which hammered again. Ex: The medical insurance coverage will go the poor families, but nothing to the middle class families. For a 5L insurance, one has to spend Rs.20k per year. They neither can’t afford private policy nor can pay hefty sums for medical treatments.
I’m completely ok to pay the tax. But there’s no transparency on what that being spent on. Ex: I pay toll & road tax for road, but I never see a road in good condition for one full calendar year.
The poor has nothing to pay, while rich can evade, it’s the poor middle class that has to pay tax for anything and everything. Several middle class bread winners like me, wanted to secure the future without any help from govt., but the govt. is keep hammering taxes on everything (be it FD,RD,MF,EQ) to make a middle class men’s lives more tough. Sorry for the rant! Apart from the Agri & Healthcare, this poorly constructed budget is a burden on a common man.
Interested thing to note is that FM while introducing LTCG, said it’s a mild proposal. In future, both short term and long term rates can be raised further.
So what happens to ELSS mutual funds. Do they serve the purpose of being a tax saving instrument?
Let’s assume a person is in 10% tax bracket and he invests 1 lakh into the ELSS mutual funds to save 10% tax. After 3 years he returns the 10% to the government?
eg.he invests 1 lakh to save 10,000 on tax. Now let’s assume his investment has appreciated and is worth 2 lakhs after 3 years. So he has an LTCG of 1 lakh rupees and he pays 10,000 back to government as the tax?
Sensible style of writing, loved the art of articulate interjections in between. Keeping in mind of your sensible views may I have certain views:
On your rich dad and poor dad
As we are classifying rich and poor (there is no middle class between) it’s not necessary to struggle to be educated or chose a profession of your choice. If Rockefeller dug oil well mills, Carnegie built still plants then of course Thomas Edison together transformed a third rated British colony to Industrial giant. Same here, if Dhirubhai weave a necessity, Jamshedji built an industrial city in a no man’s land then. Of course, some may argue we are behind some, we are ahead of some. But the fact we are ahead of our own benchmark year after year, government after government. Can we accelerate, of course yes.
You can become what you want, no matter where ever you are born, to which class you are born. Day and night dreams are seen, ideas are built and implemented. Not all of them turn out to be an Infosys or Mr Azim Premji or Mr Narendra Modi. The beauty of world is millions and billions of unsung heroes pursuing their own. In this and other forums/places I have seen a Doctor turning ROE to nutritional dream of malnourished children, early thirty guys (well paid and well educated) leading their own PMS to fulfil their dreams. Process may get delayed, derailment is in our hand. In fact, as the world turning to conceptual age it’s becoming easier and easier to fulfil own dreams. We should not have doubt, if someone wants to be Engineer he/she can be, a doctor he/she can be. Of course, perseverance, deliberate practice never goes away. Then drawing line between risk management and choice, at the end of day individual trade off decisions.
Note: I come from a poor family (as per definition between rich and poor), wanted to be CA, wanted to become a full-time investor. Blamed my father, employer, wife and every third person before realising it’s me who has to do it, no one else. No money, no system can be a show stopper. Most of the time we do not want to go beyond comfort zone (how can I be full time investor while staying in rented apartment? Well big and small dreams are built with lots of trade off and pain).
On your have and have nots
Maharashtra/Delhi 53% income tax because Income Tax returns are filed from there. Income tax returns are filed because they have head office in Mumbai. It’s like HUL files income tax return in Mumbai but every profit is earned across India by selling and soap. Yes, there are disparity between regions, it will continue as we pursue capitalism. It’s not unique to us, even countries like US, Europe have. Had it been free fund for all states, we could have collapsed long back. There are multiple sources of income, leasing and mining to industrial manufacturing to services. It’s not entirely true few states are funding others. Do we not have fiscal problems then? Of course, we have, even monetary problems. FRBM controls are further getting tightened.
In capitalism wealth is accumulated from weak hands to strong hands. Every income stream is uncertain, what else can be bigger uncertainty than stock market? One has to find a process to move from weak hand to strong hand, which is been happening regularly. May not be that acceleration we would like to see. May be more awareness, practice, mentor ship is order of they day. Till such time republic will dole out funds to artificially bridge the gap.
I completely agree, there should not be any remorse in paying taxes. Unless you earn you don’t pay taxes, what can be worst you are not paying taxes because you do not earn.
Let’s see another better day, better world again and again. I have no doubt you have the same vision as well.
I think Cap gain is at PF level amt and not stock wise
Here is the nice thing I got for you from somewhere:
+ve thoughts #Budget2018
LTCG is a measure to aid GOI rev
U pay LTCG only if mkts move above Jan 31st 2018 highs
Hence Govt can get Tax rev only if markets move up
Sit back & relax while GOI strives harder for our economy inturn reflectin in mkts upmove
I linked your line. It well supported the govt’s move. Helped me too in cooling down
Most of the structural reforms have already been taken and there impact too has started.
Due to GST implementation there was not much in indirect taxes.
Regarding LTCG Tax, it is applicable only when profits run above Rs one lac. Real long term investors hardly sell the stocks frequently thus the impact on them would would be minimal. While most retail investors hardly hold any stock for more than one year. Thus impact would be almost nil.
Corporate who invest in markets will be impacted.
Strong thrust on rural upliftment and infra spending will have positive impact on overall growth though it may take some time.
Fiscal discipline has been maintained more or less, which is a positive point.
In general, returns on equities will drop by the amount of tax. To maintain overall returns, investors will have to increase their allocation to equities (assuming other assets in the portfolio yield less than equities ). This is counter intuitive, so in the short term, prices will have to drop to make expected return go up to whatever they were just before the tax until investors factor in lower expected return from equities.
Over the last couple of years, fixed deposit investors have seen their return drop as interest rates were dropping (and that was one reason there was large inflow into equity), now equity investors have to lower their expectations. Govt is the winner in both cases.
Before the tax, investors had the luxury of switching from one stock to another every year. Now this will cost you 10% of your returns. Over time this cost will add up. This should make investors more disciplined and long term investing will truly be more rewarding. Stock flippers will lag long term investors.
One doubt for selling stock post 1jan 18 hvng holding period >365 days…
If my purchase price is lower than 31jan price than my profit will be lower on actual purchase price than new base price of 31 jan.
My belief is lower of two profits will be applicable for tax calculation.
Is that correct?