How does LTCG tax impact you?

With the Union Budget 2018, taxation on long-term capital gains was reimposed. Now, 10% will be charged on capital gains over Rs1 lakh. This has caused a stir in the market. Before we measure the impact of LTCG tax on your finances, let us first understand what capital gains are and how they are taxed.

What are capital gains?

Capital gain is the profit you earn by selling a capital asset for a price higher than the price at which you bought it. You can earn capital gains through the following class of assets:

• Stocks
• Raw materials which are helpful for business purposes
• Movable assets
• Agricultural land
• Gold bonds
• Gold deposit scheme bonds

Difference between short and long-term capital gains

Based on the tenure for which you’ve held the assets, capital gains are classified as short-term and long-term. These are taxed differently, and thus, investors should factor them in before making any capital investments.

• Short-term capital gain: Capital gains from assets held less than a year fall under this category. These are taxed at 15%.

   

• Long-term capital gain: Capital gains from assets held for more than a year fall under this category. These gains are tax-free until Rs1 lakh per annum and are taxed at 10% beyond that.

How LTCG impacts your finances?

With the introduction of LTCG, Rs1 lakh out of your capital gains is tax-exempt, but you need to pay a tax of 10% on gains above this cap. So, if you’ve earned Rs1.5 lakh from LTCG in a given financial year, you need to pay a tax of Rs5,000 (10%) on the Rs50,000 earned above the exempted limit.

This naturally does make a difference to your finances, but definitely not as significant as it seems. On the contrary, with long-term capital gains now being taxable, more and more people are looking forward to new investment avenues, such as ULIPs (unit-linked insurance plans) and Government bonds, which do not attract such tax.

But another impact of this tax is the renewed inclination of investors towards short-term capital gains, the obvious reason being the lesser margin of difference between the two taxes now.

Earlier, investors would wait for a year before selling off capital assets to save on tax, thus bearing the risk of holding the position for a longer time. Now, they tend to sell off these assets if they see a better prospect, as waiting for more than a year would not make much of a difference in terms of tax-saving.

This way, investors have figured out convenient alternatives, but on a whole, the LTCG tax has not made a drastic impact on earnings as had been perceived.