Tax on LTCG: Holding period for stocks may increase

The stock markets are facing the overhang of possible changes in the treatment of long-term capital gains (LTCG) tax for equity in the forthcoming Union Budget.

Currently, under LTCG tax, there is zero tax if a share is held for more than a year. This provision had been brought in to boost retail participation in the stock markets.

However, last month Prime Minister Narendra Modi at an event had mentioned dividend distribution tax and shares traded on stock exchanges being exempt from tax as among examples of subsidy for the rich.

This prompted speculation on whether the treatment for long-term capital gains will continue in the Budget or not.

The Prime Minister had said, “Why is it that subsidies going to the well-off are portrayed in a positive manner?”

He elaborated by saying that the total revenue loss from incentives to corporate taxpayers was over Rs 62,000 crore. “Dividends and long-term capital gains on shares traded in stock exchanges are totally exempt from income tax even though it is not the poor who earn them. Since it is exempt, it is not even counted in the Rs 62,000 crore.

Double Taxation Avoidance Treaties have in some cases resulted in double non-taxation. This also is not counted in the Rs 62,000 crore. Yet, these are rarely referred to by those who seek reduction of subsidies,” he added.

Standard Chartered says the government may increase the holding period for long-term capital gains tax. It said in a report that the government may also increase the holding period for stock-market participants to qualify for long-term capital gains tax to three years from the current one year.

“This is in order to attract more durable flows to the country, but we think the announcement could prompt a negative reaction initially. At present, if a listed security is sold within a year, it attracts 15% capital gains tax. If it is sold after a year, it attracts zero tax,” it said.
Kotak Securities said in a note that the Budget may have some minor adjustments in offing for increasing retail participation in equities, directly or indirectly.

“Reduction in securities transaction tax (STT), if any, will be cheered by the markets, while any tax liability on long-term capital gains (LTCG) will be a severe negative,” it said.

Kotak said the focus of the markets will be largely on fiscal prudence, on effective implementation of investments, and on sectors which are impacted by the Budget proposals.

Off-Budget investment and governance reforms announcements will continue to impact the markets.