The FPIs always feared that the move to raise the holding period could further increase the

cost of
transaction and impact incremental inflows to Indian equities. There was a clear demand in
anticipation to the government for keeping the status quo on LTCG in equities for FPIs.

Indian economy, for long, has been considered comparatively stable against many of its peers. Also,
the volatility in the Indian currency is relatively lesser compared to currencies of other emerging
market. Also, the returns delivered by major indices in India is relatively better against most global
peers. All these factors make Indian markets lucrative for an ongoing flow of FPIs as the return on
investment is attractive at any time scale. Foreign portfolio participation has seen an upswing in
terms of investments in equity markets and the volumes it brings in plays a pivot role in stability of
the markets.

It has been a tremendous journey for the Indian equity markets in 2017. After taking a break from
buying into Indian equities in August and September, FPIs bought equities in abundance in
November and December of 2017. The buying spree continued in the 2018 with an FPI inflow of at
$3.5 Billion in Indian capital markets for January 2018 backed up with better earnings estimates on
D-Street, until the budget announcement of LTCG tax on equities.

Covering FPI in the preview of LTCG will eventually make the returns lesser attractive for the
investment portfolios in India. Allowing the gains made until January 31, 2018, to be completely
exempt from capital gains tax could be a catch since the markets are currently at record highs. FPIs
may certainly look forward to taking home marginal profit to enjoy the benefits of grandfathering
but there is pain in terms of the capital gain tax to be paid on the longer term. The markets will fairly
adjust for this and the allow the impact to be a short-term phenomenon. This may certainly make
end returns less attractive but surely it is not the deciding factor to restrict fresh flow of capital from
the FPIs for investing in Indian equities.

Globally there the scenario is of a mixed view in terms of LTCG tax to be implemented where the
developing countries levy anywhere between 15-25% of tax on long term capital gains. The
introduction of long-term capital gains tax in equities is not going to have a major impact on the
foreign portfolio investors’ flow into the Indian equity market and the investment flow will restore
once the post budget ripples in the markets are back to normal. Headwinds may be faced in the
short run, but the growth story of India continues to be perceived as a long-term investment
destination. We certainly have the fiscal reforms in place that will help in retain this appeal. The fair
risk reward profile as compared to global peers will allow FPIs to continue investing in India.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily
represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing
in his/her personal capacity. They are not intended and should not be thought to represent official
ideas, attitudes, or policies of any agency or institution.

The market’s worst fear came true on Thursday. The Budget has proposed to tax long-term capital
gains exceeding ₹1 lakh from the transfer of listed equity shares, units of equity-oriented funds at a
rate of 10 per cent.

Though the markets turned nervous immediately after this announcement, the benchmark indices
clawed back from the day’s lows. Also, to promote the trades in stock exchanges located in the
International Financial Services Centre (IFSC), the capital gains on derivatives and certain securities
transacted by non-residents have been exempt from tax. Additionally, the Alternative Minimum Tax
(AMT) for non-corporates in IFSC has been fixed at a concessional rate of 9 per cent. This could boost
transactions in the IFSC at the GIFT City that is beginning to see traction in recent months.

The introduction of long-term capital gains tax in equities is not going to have a major impact on the
foreign portfolio investors’ flow into the Indian equity market.

The background

India has been one of the much sought after emerging market destinations for FPIs. Data from the
National Securities Depository Limited (NSDL) is clear evidence for this. Data available for the last 16
years (since 2002), indicates that in only two years, FPIs were net sellers in the Indian equity
segment. In 2008, they sold around $12 billion and in 2011 $0.36 billion. On similar lines, after
buying about $7.6 billion in equities in 2017, the flows in 2018 have also begun on a strong note with
FPIs having pumped in $2.2 billion in January.

Three major factors make India more attractive for the FPIs. Firstly, the Indian economy is
considered more stable compared to many of its peers. Secondly, the volatility in the Indian currency
is relatively less (and consequently the currency is more stable) compared to other emerging market
currencies. This makes the return on investment more attractive for the FPIs. Thirdly, the Indian
benchmark indices have given relatively better returns over the last few years. In four out of the last
six years, Indian equities have given the best return (year-on-year).

Impact
Allowing the gains made until January 31, 2018, to be completely exempt from capital gains tax
could be a catch since the markets are currently at record highs. FPIs may want to lock-in some
profit to enjoy the benefits of grandfathering. But this could be a short-term phenomenon and will
not stop the FPIs from investing in Indian equities. Also, according to sources, while markets such as
Singapore and Hong Kong do not tax the capital gains from equities, others such as Brazil (15 to 22
per cent), China (25 per cent), and South Africa (22 per cent) do levy this tax. Given this and with
India taxing the gains exceeding ₹1 lakh only, FPI flows are unlikely to lose momentum.

What is a 'Foreign Institutional Investor - FII'

A foreign institutional investor (FII) is an investor or investment fund registered in a country outside
of the one in which it is investing. Institutional investors most notably include hedge funds,
insurance companies, pension funds and mutual funds. The term is used most commonly in India
and refers to outside companies investing in the financial markets of India.

A foreign institutional investor (FII) is any type of large investor who does business in a country other
than the one in which the investment instrument is being purchased. In addition to the types of
investors above, others include banks, large corporate buyers or representatives of large
institutions. All FIIs take a position in a foreign financial market on behalf of the home country in
which they are registered.

Foreign Institutional Investors (FII) in India

Countries with the highest volume of foreign institutional investments are those that have
developing economies. These types of economies provide investors with higher growth potential
than in mature economies. This is why these investors are most commonly found in India, all of
which must register with the Securities and Exchange Board of India to participate in the market.

If, for example, a mutual fund in the United States sees an investment opportunity in an Indian-
based company, it can purchase the equity on the Indian public exchange and take a long position in
a high-growth stock. This also benefits domestic private investors who may not be able to register
with the Securities and Exchange Board of India. Instead, they can invest in the mutual fund and take
part in the high growth potential.

Foreign institutional investors (FIIs) are those institutional investors which invest in the assets
belonging to a different country other than that where these organizations are based.

Description: Foreign institutional investors play a very important role in any economy. These are the
big companies such as investment banks, mutual funds etc, who invest considerable amount of
money in the Indian markets. With the buying of securities by these big players, markets trend to
move upward and vice-versa. They exert strong influence on the total inflows coming into the
economy.

Market regulator SEBI has over 1450 foreign institutional investors registered with it. The FIIs are
considered as both a trigger and a catalyst for the market performance by encouraging investment
from all classes of investors which further leads to growth in financial market trends under a self-
organized system.

Foreign Institutional Investor (FII) means an institution established or incorporated outside India which
proposes to make investment in securities in India. They are registered as FIIs in accordance with Section
2 (f) of the SEBI (FII) Regulations 1995. FIIs are allowed to subscribe to new securities or trade in already
issued securities. This is just one form of foreign investments in India, as may be seen here:

However, FII as a category does not exist now. It was decided to create a new investor class
called "Foreign Portfolio Investor" (FPI) by merging the existing three investor classes viz. FIIs, Sub
Accounts and Qualified Foreign Investors. Accordingly, SEBI (Foreign Portfolio Investors) Regulations,
2014 were notified on January 07, 2014 followed by certain other enabling notifications by Ministry of
Finance and RBI. In order to ensure the seamless transition from FII regime to FPI regime, it was decided
to commence the FPI regime with effect from June 1, 2014 so that the requisites systems and procedures
are in place before migration to the new FPI regime.

With the new FPI regime, which has commenced from 1 June 2014, it has now been decided to dispense
with the mandatory requirement of direct registration with SEBI and a risk based verification approach has
been adopted to smoothen the entry of foreign investors into the Indian securities market.

FPIs have been made equivalent to FIIs from the tax perspective, vide central government notification
dated 22nd January 2014.
 FII (Foreign Institutional Investment) and FPI (Foreign Portfolio Investment) are same things.
The foreign institutions invest in a capital / money market which is not their home country. Such
kinds of investments are seen in the Mutual Funds, Investment Companies, Pension Funds and
Insurance Houses. This means that FII/ FPI brings only capital. FII is also called Foreign Indirect
Investment.

A portfolio investment does not entail active management or control of the target organization.
This is done by the investors if they are not interested in involvement in the management of a
company. The objective of the indirect investment is to financial gain only and does not create a
lasting interest in or effective management control over an enterprise.

The FII impact inflation indirectly rather than directly. If there an excess inflow of FII, it may
shoot the prices of stocks very high. When stocks become costly, there would be a huge demand
for Indian rupees. To fulfil that demand, RBI would need to print more money and pump this
money to economy. All of a sudden, if FII withdraw the funds, there would be an excess of
liquidity in the markets. This would lead to a situation of too much money chasing too few goods
and thus things would become costlier. Thus, unchecked FII inflow and outflow can bring into
demand pull inflation.
When there is a high inflation in the country, it repels FII. Rising inflation in India makes the
investors bothering.
FII inflows are aimed at making money on the invested capital i.e. Capital gains. The capital
gains are linked to the interest rates and stock market environment. If the interest rates / potential
gains in one country go down in comparison to other target country, the FII inflow may halt or
outflow may begun. That is why FII money is called hot money sometimes. In summary, the
most suitable conditions for FII are as follows:
 Attractive Interest Rates
 Adequate money supply and stable rate of inflation
 Stable exchange rates
 Low deficit in Balance of payments.

A portfolio investment is a grouping of assets such as stocks, bonds, and cash equivalents. Portfolio
investments are held directly by an investor or managed by financial professionals. In economics,
foreign portfolio investment is the entry of funds into a country where foreigners deposit money in a
country's bank or make purchases in the country’s stock and bond markets, sometimes for
speculation.[1][2]

Portfolio investments typically involve transactions in securities that are highly liquid, i.e. they can be
bought and sold very quickly. A portfolio investment is an investment made by an investor who is
not involved in the management of a company. This is in contrast to direct investment, which allows
an investor to exercise a certain degree of managerial control over a company. Equity investments
where the owner holds less than 10% of a company's shares are classified as portfolio investment.[3]
These transactions are also referred to as "portfolio flows" and are recorded in the financial account
of a country's balance of payments.

Portfolio flows arise through the transfer of ownership of securities from one country to another.[4]
Foreign portfolio investment is positively influenced by high rates of return and reduction of risk
through geographic diversification. The return on foreign portfolio investment is normally in the
form of interest payments or non-voting dividends.

Foreign portfolio investment (FPI) consists of securities and other financial assets passively held by
foreign investors. It does not provide the investor with direct ownership of financial assets and is
relatively liquid depending on the volatility of the market. Foreign portfolio investment differs from
foreign direct investment (FDI), in which a domestic company runs a foreign firm, because although
FDI allows a company to maintain better control over the firm held abroad, it may face more
difficulty selling the firm at a premium price in the future.

foreign portfolio investment (FPI) refers to investing in financial assets such as stocks or bonds in a
foreign country. A number of other differences follow from the basic difference in the nature of
these two types of investments.

Foreign Portfolio Investment

FPI typically has a shorter time frame for investment return than FDI. As with any equity investment,
FPI investors usually expect to quickly realize a profit on their investments. But unlike FDI, FPI
doesn't offer control over the business entity in which the investment is made.

As securities are easily traded, the liquidity of FPIs makes them much easier to sell than FDIs. FPIs
are more accessible for the average investor than FDIs because they require much less investment
capital.

Foreign Portfolio Investment (FPI) is investment by non-residents in Indian securities including

shares, government bonds, corporate bonds, convertible securities, infrastructure securities etc. The
class of investors who make investment in these securities are known as Foreign Portfolio Investors.

FPI is induced by differences in equity price scenario, bond yield, growth prospects, interest rate,
dividends or rate of return on capital in India’s financial assets.
 SEBI has recently stipulated the criteria for Foreign Portfolio Investment. According to this, any
equity investment by non-residents which is less than or equal to 10% of capital in a company is
portfolio investment. While above this the investment will be counted as Foreign Direct Investment
(FDI).

Investment by a foreign portfolio investor cannot exceed 10 per cent of the paid up capital of
the Indian company. All FPI taken together cannot acquire more than 24 per cent of the paid up
capital of an Indian Company. As per SEBI regulations, FPIs are not allowed to invest in unlisted
shares and investment in unlisted entities will be treated as FDI.

Who are Foreign Portfolio Investors?

Foreign Portfolio Investors includes investment groups of Foreign Institutional Investors (FIIs),
Qualified Foreign Investors (QFIs) (Qualified Foreign Investors) and subaccounts etc. NRIs doesn’t
comes under FPI.

After the new SEBI guidelines, the RBI stipulated that Foreign Portfolio Investors include Asset
Management Companies, Banks, Pension Funds, Mutual Funds, and Investment Trusts as Nominee
Companies, Incorporated / Institutional Portfolio Managers or their Power of Attorney holders,
University Funds, Endowment Foundations, Charitable Trusts and Charitable Societies etc. Sovereign
Wealth Funds are also regulated as FIIs.

Who is a Foreign Institutional Investor?

FII is an institution like a mutual fund, insurance company, pension fund etc. According to SEBI,
“an FII is an institution established or incorporated outside India which proposes to make
investments in India in securities”. FII is an institution who is registered under the Securities and
Exchange Board of India (Foreign Institutional Investors) Regulations, 1995. FIIs comprised of a
pension fund, a mutual fund, investment trust, insurance company or a reinsurance company.

A long-term capital gain or loss is a gain or loss from a qualifying investment owned for longer than
12 months before it was sold. The amount of an asset sale that counts toward a capital gain or loss is
the difference between the sale value and the purchase value, or simply, the amount of money the
investor gained or lost when he sold the asset. Long-term capital gains are assigned a lower tax rate
than short-term capital gains in the United States.

It is the tax paid on profit generated by an asset such as real estate, shares or share-oriented
products held for a particular time-frame. The definition of Long-term Capital Gains, or LTCG, is
different for various products.

What is long-term capital gains (LTCG) tax?

It is the tax paid on profit generated by an asset such as real estate, shares or share-oriented
products held for a particular time-frame. The definition of Long-term Capital Gains, or LTCG, is
different for various products.

Why is LTCG tax in the news now?

Finance Minister Arun Jaitley, in his Union Budget speech, re-introduced LTCG tax on stocks. Investors will have
to pay 10 per cent tax on profit exceeding Rs 1 lakh made from the sale of shares or equity mutual fund schemes
held for over one year. Till now, LTCG was exempt from tax. The definition of a long-term investor in stocks for
tax purposes is one year. LTCG tax on stocks was scrapped in 2004-05 by then finance minister P
Chidambaram. ..

The budget talks about 'grandfathering' in LTCG. What is that?

The 'grandfathering' clause is the exemption granted to existing investors or gains made by them
before the new tax law comes into force. Whenever the government introduces a stricter tax law, it
has to ensure that investors who have committed money keeping in mind the easier tax regime are
protected. In the matter of LTCG tax on shares, the government said gains from shares or equity
mutual funds made till January 31, will be grandfathered - or exempted. There will be no LTCG tax on notional
profit in shares till then.

So, who will come under the new LTCG tax net?

The Budget proposes that LTCG tax will have to be paid on profit booked after March 31. "This
means that for sale of shares made till March, the existing law will apply and this tax will not be
applicable," said Gautam Mehra, leader - India Tax and Regulatory, PwC. In short, if you sell before
March 31 a stock that has been held for more than a year, you do not pay tax. So, for tax purposes,
there should not be any motivation for .. investors to sell in February and March. However, if you sell it on
or after April 1, LTCG tax will apply on the gains made.
Also, this tax is applicable only if LTCG is above Rs 1 lakh in a financial year. So, if an investor made
long-term gains of Rs 150,000 in a year, LTCG tax is applicable only for Rs 50,000 (Rs 150,000-
100,000).

How will LTCG tax be calculated since gains till January 31 have been grandfathered?

If an investor sells stock or equity mutual fund held for over a year after April 1, LTCG tax will be
calculated on the basis of the acquisition price or closing price on January 31, whichever is higher. Take
the example of a stock purchased on January 15, 2017, for Rs 100, which closed at Rs 200 on January 31, 2018.
If sold after March 31, LTCG tax will be calculated based on the closing price of January 31, which is higher.

What is Long-Term Capital Gains Tax

If the capital asset (stocks, bonds, land, residential property etc.) is sold after 36
months from the date of acquisition, profits from the sale are termed as long term
capital gain. Long term capital gains are taxed at the flat rate of 20%.However, you
can save 100% of this tax under various sections available under IT Act. For long
term capital gains, you can also take benefit of Cost Inflation Index.

Since, we can take indexation benefits, long term capital gains can be calculated by the
formula:

Long Term Capital Gain = Sale Consideration – (Indexed Cost of Acquisition + Indexed
Cost of Improvement + Cost of Transfer + Exemptions)

Exemptions on Long Term Capital Gains Tax

Various exemptions on long term capital gains tax are available under Section
54, Section 54B, Section 54D, Section 54EC, 54F, 54G and 54GA. You can calculate your
long term capital gains tax after deducting the amount of deductions that you are eligible
under these sections.

Until you invest your capital gains amount, you can keep your capital gains money in
a Capital Gains Account Scheme available at all major Public Sector Banks.

Other Ref:
Income Tax India
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Your response is private.
Is this answer still relevant and up to date?

Kirti, I have written in simple terms about Income tax at bemoneyaware.com

Answered May 20, 2018 · Author has 226 answers and 1.3m answer views
Gains, which arise from the transfer of capital assets, are subject to tax
under the Income-tax Act. If one sells an asset such as bonds, shares, mutual fund
units, property etc, one must pay tax on the profit earned from it. This profit is
called Capital Gains. The tax paid on this amount of capital gains is called Capital
Gains Tax. Conversely, if you make a loss on sale of assets, you incur a Capital Loss

Income Tax and Capital Gains

For the purpose of Income Tax, Under Section 14 income is classified under the
following heads:

1. Salaries.
a. Income from house property.
i. Profits and gains of business or profession.
ii. Capital gains.
iii. Income from other sources.
Our post Income tax overview deals in detail on calculation of Income tax.

Type of Assets

Capital asset means property of any kind held by an assessee whether or not connected
with his business or profession. Assets which are considered for computation of capital
gains can be classified as:

 Debt Mutual Fund

 Equity Mutual Funds with Securities Transaction Tax (STT) paid
 Stocks with Securities Transaction Tax (STT) paid
 Fixed Maturity Plan(FMP)
 Real Estate, Gold etc.
Computation of Capital Gains

Computation of capital gains depends upon following things:

 The nature of capital asset that is transferred ex: Mutual Fund, Stocks,
Property, Gold
 Time for which asset was owned based on the type of asset. Ex: If
Shares, Equity Mutual Funds are for which Securities Transaction
Tax(STT) has been paid, are transferred after being held for an year it class
as Long Term Capital Gain. If Period of holding is less than 1 year it
classifies as Short Term Capital Gain.
 Cost of acquisition, Cost of improvements, Expenditure incurred exclusively
in connection with the transfer.
 Exemptions allowed under the income Tax Act.
Period or Time of Holding

The period for which an asset has been held by the person prior to its
transfer is also relevant in determining the quantum of capital gains. For
example a person might not have himself acquired the property, but might have become
the owner of the property due to say:

 Distribution of assets on the total or partial partition of a Hindu Undivided

family.
 Under a gift or will
 By succession, inheritance or devolution
 Distribution of assets on the liquidation of a company.
In such situations in computing the period for which asset was held, the period for which
asset was held by previous owner should also be included. In such cases the
purchase/cost price would be the cost to the previous owner. For example:

Mr Sharma receives a house property as gift on 14-2-2012. If the donor has originally
acquired the property on say 11-1-2009 and person decides to sell the property on 18-2-
1993( i.e 5 days after receiving the gift) the period for which the property was held will be
worked out as follows:

 Period for which previous owner held the asset (11-1-2009 to 13-2-2012): 37
months and 3 days
 Period for which Mr Sharma held the asset (14-2-2012 to 18-2-2012): 5 days
Total period of holding: 37 months and 8 days. Hence house property will be treated as a
long term capital asset for capital gain purposes.

Long term and short term capital gain tax on different types of assets after 1 Apr 2018
are shown in the image below.

Our article Basics of Capital Gain covers it in detail.

You can use our calculator Capital Gain Calculator from FY 2017-18 with CIIfrom 2001-
2002 to calculate Long and short term capital gains.

122 Views

Pooja Solanki
Answered Apr 9, 2016 · Author has 99 answers and 407.9k answer views
Long term Capital gains, if the assets like shares and securities, are held by the assessee
for a period exceeding 12 months or 36 months in the case of other assets. Units of UTI
and specified mutual funds will now be eligible for treatment as long term capital assets
if they are held for a period exceeding 12 months.

Long term Capital gains are computed by deducting from the full value of consideration
for the transfer of a capital asset the following :

- Expenditure connected exclusively with the transfer;

- The indexed cost of acquisition of the asset, and

- The indexed cost of improvement, if any, of that asset. In the case of shares,
expenditure in connection with the transfer includes the stock broker’s commission but
the salary of an employee is not deducted in computing capital gains though the
employee may have helped in the transfer of the shares.

Cost of acquisition, in such cases includes the price-paid, cost of share transfer stamps,
cost of postage for sending the shares for transfer to the transfer-agents of the company,
legal expenses etc.

‘Indexed cost of acquisition’’ means an amount which bears to the cost of acquisition the
same proportion as Cost Inflation Index for the year in which the asset is transferred
bears to the Cost Inflation Index for the first year in which the asset was held by the
assessee.

For further minor to major grasp on this discussion contact us on www.finmart.com

8.5k Views · View Upvoters

Fundz Bazar, Research Team (2010-present)

Answered Jan 16, 2018 · Author has 261 answers and 229.7k answer views
Any Gain/Loss arising from transfer of capital asset is considered as Capital Gain/Loss.

There are two types of Capital gain/loss

1. Short term capital Gain

2. Long term capital gain
For Mutual Funds, the profits you make on your mutual funds investment when you
redeem of sell the units of fund is referred as Capital Gains.

Different tax rates are applicable on such capital gain/loss, depending on the asset type
and period of holding. Let’s discuss the factors determining the Tax status of
Mutual Funds:

Categorization of Mutual Funds for taxation purpose:

Equity Funds: Those funds which invest more than 65% of investible corpus in Indian
equities are known as equity oriented funds.
Non – Equity Funds: Funds where investment in Indian equities is less than 65% is
considered as non equity funds. Non Equity Funds mainly include Debt funds (Such as
Liquid, Income, Gilt, Fixed Maturity Plans, MIPs), Gold ETFs and also fund of funds.

Tax rates & holding period for Equity & Debt Funds:

 In case of Equity Funds

o Holding Period
 Short Term Capital Gain will arise if units are sold before 1 year
 Long Term Capital Gain will arise if units are sold after 1 year
o Tax on Capital Gain
 Short Term Capital Gain will be taxed @ 15%
 Long Term Capital Gain is exempt from tax
o Tax on Dividends
 Dividends in the hands of investors are tax free.
 No Dividend distribution tax is deducted by the AMCs
 In case of Debt Funds
o Holding Period
 Short Term Capital Gain will arise if units are sold before 3 years
 Long Term Capital Gain will arise if units are sold after 3 years
o Tax on Capital Gain
 Short Term Capital Gain will be taxed as per slab
 Long Term Capital Gain will be taxed at 20% after the benefit of indexation
o Tax on Dividends
 Dividends in the hands of investors are tax free.
 While Dividend distribution tax will get deducted @ 25% in case of
Individual/HUF/NRI and @ 30% in case of corporates
What is Indexation? (Available in case of Debt Funds only)

Indexation is the process that inflates the purchase price of the asset to take into account
the impact of inflation considering the time of purchase & sell

Every year government declares Cost Inflation Index (CII) which is used to measure the
rate of inflation in the economy.

Let us understand this with the help of an example:

Suppose you have invested Rs 500000 in debt fund on May 25, 2013. And, you decide to
sell these units on December 20, 2016. The redemption value comes to Rs 635000.

Since the investments are held for more than 36 months, the gain of Rs. 135000 will be
construed as long term capital gain & therefore you will get the benefit of indexation.

Indexed cost of purchase = (Cost of purchase) * (CII for the year of sale/ CII for the year
of purchase)

So, the benefit of indexation substantially reduces the tax and increases the post tax
return earned from debt funds.

Happy Investing!!!

3.9k Views · View Upvoters

Ronak Agarwal, Head of Business Growth & Marketing at Choice International Limited (2008-
present)
Answered Feb 20, 2018
Long-Term Capital Gains Tax

The “Listed” Stocks sold less than 12 months are considered Short-Term Capital and the
same sold over 12 months become Long-Term Capital. Profits incurred on selling these
stocks held for over 12 months abbreviated as LTCG’s or Long-Term Capital gains, taxes
on the same are called LTCG Tax.

Now, STCG’s (Short-Term Capital Gains) were already taxed at 15% it was only a matter
of time for LTCG’s (Long-Term Capital Gains weren’t taxed since 2004!) PM Narendra
Modi had made it fairly evident in his December, 2016 speech, at the inauguration of
National Institute of Securities Markets he said,

“Those who profit from financial markets must make a fair contribution to nation-
building through taxes. For various reasons, the contribution of tax from those who
make money on the markets has been low. To some extent, the low contribution of taxes
may also be because of the structure of our tax laws. Low or zero tax rate is given to
certain types of financial income. I call upon you to think about the contribution of
market participants to the exchequer. We should consider methods for increasing it in a
fair, efficient and transparent way.”

The Changes in 2018 Budget for LTCG’s:-

 Any Equity based Mutual Fund Scheme sold after a year from the Date of
Purchase will be taxed at 10% on profits. No Indexation benefit i.e. Cost
revision due to Inflation is applicable
 Upto 1 Lakh on profits is exempted from Ta

Capital gain is a rise in the value of a capital asset (investment or real estate) that gives
it a higher worth than the purchase price. The gain is not realized until the asset is sold.
A capital gain may be short-term (one year or less) or long-term (more than one year)
and must be claimed on income taxes.

One of the biggest fears of equity investors has come true: Long term-capital gains (LTCG) tax on equities is
back. Expectedly, the announcement made by the Finance Minister on 1 February 2018 rattled the stock market,
sending the markets on a down ward spiral. The Sensex tanked by more than 1,000 points (as on 2 February
2018) since the announcement. Grandfathering of capital gains till 31 Jan 2018—LTCG earned up to this date
won’t be subject to tax—prevented the market from plummeting on Budge .. day, but it could not rein in the fall
the day after.

“Market has accepted 10% tax on LTCG because of the grandfathering of gains till 31 Jan 2018. However, it will
realise other negatives like continuation of STT, not providing indexation benefit to long-term equity investors,
etc. later,” predicted Dhiraj Relli, CEO, HDFC Securities on Budget day.

How LTCG impacts you

Since the securities transaction tax (STT) was introduced as an alternative to LTCG tax on equities, retaining
STT was a bigger shock for investors. “The real disappointment was the continuation of STT along with the LTCG
tax. Logically, there should be just one tax,” says Jayant Manglik, President, Religare Broking.

Besides their return potential, equities drew investors because of tax-free gains,
imposition of LTCG tax will now hurt inflows. “LTCG of 10% reduces the relative
attractiveness of equity as an asset class and can act as a short-term dampener,”
says Unmesh Kulkarni, Managing Director, Julius Baer Wealth Advisors.

The attractiveness of equity compared to debt funds stands eroded because its tax advantage is now gone.
While LTCG tax is 10% without indexation for equities, it is 20% for debt funds with indexation benefit. Assuming
8% return from debt funds and 5% inflation, the effective LTCG tax on debt funds works out to be 7.5%.
However, equities will become attractive, if their returns are higher.

Holding equities will also get costlier now. “With STT and LTCG tax in place, the
long-term cost of holding equities has gone up,” says Relli. Unlike domestic mutual
funds, which don’t have to pay LTCG tax, foreign institutional investors will now
have to pay tax on their trades which will push up their costs