• HDFC
• 25 Jan 2018
• Blog Articles

HDFC, Tester

For many years, the markets tend to get nervous around the time of the budget. The common worry is that the tax exemptions which have been enjoyed for more than 13 years will be withdrawn. With the Union Budget around the corner, the markets are once again about the possibility of Long Term Capital Gains (LTCG) Exemption being withdrawn.

 

Under the current laws, LTCG are completely exempt from any form of taxation if a stock held for more than a year is sold at a profit and if securities transaction tax (STT) has been paid on the sale. On the other hand, Short Term Capital Gains are taxed at a rate of 15%. It is quite unlikely that the government would thing of taxing the capital market. Here’s why:

 

• The government gets much more via STT as opposed to taxing long-term capital gains.
• This is a fool-proof system, as there is no leakage since STT is collected at source on each buy and sell transaction.
• With only 1.3% of the Gross Net Disposal Income being invested in equity, there is a need to increase it. 
• Recent demonetization and increased digitalization of financial transactions will only accelerate the process.
• As more money flows into equity, STT revenue will definitely grow. 
• In 1992, during Harshad Mehta’s time, the percentage of GNDI being put in equities was almost double at 2.3%. 
• At a time when only 1% of the population pays income tax, the government has to first broaden the taxpayers’ base. Motivating more people to invest in equities, the government automatically increases its STT revenue.
• Bringing back the capital gains tax is neither warranted nor desirable.

 

However, there is no certainty as to whether the government will re-introduce the Capital Gains Tax.

If LTCG make a comeback:

 

It will have an impact on investors at the time of selling the stock since they would have to pay LTCG. The quantum of tax then payable will be a function of the new tax rate and the Indexation benefit that will be allotted to arrive at the investor’s acquisition price. But it is certain that the new regime would cut into investors’ net of tax proceeds. However, investors wanting to take advantage of the current exemption can consider selling their portfolio at the CMP, and buy the same shares in a family member’s name. This keeps the number of shares in the family unchanged. The advantage is that investors don’t have to pay any long-term capital gains tax.

 

If you have bought a share at Rs 10 in the year 2000, and you are now selling the same at Rs 200, the entire Rs 190 profit is exempt from the tax. For your family member, the acquisition cost is now Rs 200. So when he sells the stock after a period of time, he pays long-term capital gains tax only on the gains over and above his acquisition cost of Rs 200. Now assume that the LTCG is taxed in the budget. You will be happy that you did this exercise.

 

If LTCG remains unchanged:

 

In this case, the investor’s only loss is the actual brokerage paid. However, the broker may be willing to give a finer rate for this one-time portfolio churning. More importantly, the investors are saved of perennial worries each year before the budget. But if investors don’t want to get into the hassle of dragging a family member into this, the other options would be to sell the stocks one day and buy the following day. In this, there would be a price difference, which could be either profit or a loss.

 

Last year, many industrialists, including the richest Indian, sold some of their promoter holdings in a few of his companies to other group investment companies. Investors may also consider doing this. If the value of a single deal is more than Rs 10cr, it can be transacted through the block deal window.

 

Should you do it?

 

If you are not planning to sell stocks in the near future, you don’t have to worry about it. But if tomorrow you have to sell stocks to raise some money for your venture or any other reason, and if the rules change, you will have to pay LTCG. We are not suggesting that you shred your entire portfolio. If altering the whole portfolio is not your objective, at least do that with your recent multi-baggers.
Take initiatives, not chances with the budget.

 

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