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Budget 2018 - a Dampener for Investors

February 5, 2018 9986 Views
Shripal Lakdawala
Partner with Deloitte Haskins & Sells LLP
Shefali Ganatra
Assistant Manager at Deloitte Haskins & Sells
Madhvi Jajoo
Manager at Deloitte Haskins & Sells

Finance Act, 2004 introduced section 10(38) and provided exemption on long term capital gains (LTCG) arising on transfer of a long term capital asset being equity shares listed on a recognized stock exchange. The said exemption was introduced in order to incentivize investments in equity markets in India. Subsequently, LTCG arising on transfer of units of equity-oriented mutual funds and units of business trusts were also covered by the exemption under section 10(38) of the Income tax Act, 1961 (ITA).

The government is now of the view that the Indian stock market has become resilient on account of reforms and incentives introduced so far. Thus, the Finance Bill proposes to terminate the exemption granted to LTCG arising on transfer of listed shares or units of equity oriented mutual funds or units of business trusts by introduction of section 112A.

The Finance Minister endorsed the introduction of the new section on the back of significant revenue loss to the exchequer in the present regime. Further, it is also viewed as a move towards encouraging investment in the manufacturing sector as opposed to the present-day case of overwhelming investment in financial assets.

LTCG (exceeding Rs 1 lakh) arising on transfer of equity shares listed on a recognized stock exchange or units of equity oriented mutual funds or units of business trusts is proposed to be taxed at a concessional rate of ten percent. Also, it is proposed that the income distributed by equity oriented mutual funds will be taxed at the rate of ten percent.

The concessional rate of 10% shall be available only if securities transaction tax (STT) has been paid on:

  •  both acquisition and transfer in case of equity shares; and

  •  on transfer of units of equity-oriented mutual funds or units of business trust.

The central government shall subsequently notify certain transactions of acquisition of listed equity shares where the requirement of payment of STT shall not apply. The condition of payment of STT shall not be applicable for transactions undertaken on recognized stock exchanges located in any International Financial Services Centre and where the consideration for such transfer is received or receivable in foreign currency.

For the purpose of computing gains under section 112A, the following will have to be considered:

   •  the benefit of indexation shall not be available for the purpose of computing LTCG in case of residents,

   •  the benefit of computation of LTCG in foreign currency shall not be available in case of non-residents,

   •  the cost of acquisition of the capital asset acquired before 1 February 2018 shall be deemed higher of the following:

  ○  the actual cost of acquisition or

  ○  lower of fair market value or consideration received or accruing on transfer of such capital asset

For the purpose of this section, the fair market value shall be the highest price quoted on the stock exchange as on 31 January 2018 in case of equity shares and the net asset value as on 31 January 2018 in case of units of equity-oriented mutual funds and units of a business trust.

Further, the basic exemption limit shall be available against such LTCG included in the total income for resident individuals and Hindu undivided family. However, deductions under chapter VI A and rebate under section 87A shall not be available if the income of a tax payer only includes such LTCG.

The move to tax LTCG may temporarily dampen the investor sentiment. Nevertheless, the government is optimistic that the ongoing buoyancy in the equity market may not be impacted by temporary set-backs, if any. Only the passing of time shall reveal the true effect of taxing LTCG.

Information for the editor for reference purposes only

Shripal Lakdawala is a Partner, Madhvi Jajoo is a Manager and Shefali Ganatra is an Assistant Manager with Deloitte Haskins and Sells LLP


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