Budget 2017 May Hike Capital Gains Tax on Stocks-Likely Changes

Capital Gains – Panic gripped the stock markets last week following Prime Minister Narendra Modi’s assertion that gains from the capital markets are getting away with the low tax. Finance Minister Arun Jaitley hurriedly clarified that Modi’s statement should not be construed as an intent to impose long-term capital gains tax on equities. Even so, there is intense speculation that the coming Budget could change the tax rules for stock investments.

Possible Changes In Budget Capital Gains 2017

Long-term capital gains
Existing rule: 
No tax if held for one year.
Possible change: Minimum holding period extended to 2-3 years.

Long-term capital gains
Existing rule: No limit on the gains that are tax-free.
Possible change: Tax-free gains may be capped so that small investor not affected.

Short-term capital gains
Existing rule: 15% tax on the gain if stocks, funds sold before one year.
Possible change: Tax rate hiked to 20% or gains added to the income of investor.

Dividend income
Existing rule: 10% tax if dividends exceed `10 lakh in a year.
Possible change: To be taxed on basis of individual tax slabs.

Longer minimum holding period
One change could be a longer holding period for stocks and equity funds to qualify for tax exemption of long-term capital gains. Currently, if stocks and equity funds are held for one year, the gains are tax-free. The coming Budget could extend this minimum holding period to two or three years. “The last Budget had increased the minimum holding period for unlisted securities to two years.

“If the long-term holding period is extended to 2-3 years, investors will also get a longer time frame to set off losses from stocks.” Sudhir Kaushik CFO and co-founder, Taxspanner.com.

The government might use this as an excuse to extend this rule to listed stocks this year,” says Mehraboon Irani, Principal & Head (Private Client Group), Nirmal Bang Securities.

This means if stocks and equity funds are held for less than 2-3 years, the gains will be taxed. The age data of stock ownership is not available, but mutual fund statistics are indicative of the average Indian’s investing horizon.

According to AMFI data, almost 23% of the investments in equity funds are redeemed after more than a year but before two years. If the definition of long-term capital gains is changed, the gains from these investments will be taxable.
Though the change might cause some disruption in the market, some experts believe they could also encourage stock investors to take a longer-term perspective.

If short-term gains from stock investments will be taxed at a higher rate, investors will hold their investments for longer periods to escape the tax. “It might stop people from treating the stock market like a gambling den where they can make big money very quickly,” says investment expert Vijay Kedia.

Tax professionals see another silver lining if the minimum holding period is extended. “It will give investors a bigger window to set off their short-term losses from stocks against other taxable gains,” says Sudhir Kaushik, CFO, and Co-founder of tax filing portal Taxspanner.com. Only short-term losses can be set off against other taxable gains. Long-term losses cannot be adjusted.

(As Published in ET Wealth on Jan 2, 2017)