Budget 2018: Long Term Capital Gain Tax, DDT…

The Union Budget 2018 is good or bad for common men’s personal finance? It introduced LTCG (Long Term Capital Gain Tax).

Prima facie it is causing disruptions for sure.

Long term capital gain tax (LTCG) and Dividend distribution tax (DDT) has been introduced again.

But small investors will not be effected much by LTCG.

I heard our finance minister saying, “… I have been putting surplus money in the hands of the middle-class taxpayer”. Lets see how much of this is true.

From the side of the Indian Government, it is also true that fiscal health of India has been deteriorating.

The easy way forward to manage this situation is to tax the salaried middle class more.

The Finance Minister has not taxed the people directly, it has been done through LTCG, DDT, CESS etc.

But the small investors has been spared as LTCG upto Rs.1.0 Lakhs will not be taxed.

In this article we will see in short, various pros and cons of this Union Budget 2018 on our personal finance.

Lets start with the most talked about case of this Union Budget 2018

#1. Long Term Capital Gain Tax (LTCG) – 10%

LTCG has been imposed again on equity linked investments.

Yes, LTCG has not been imposed for the first time in India.

In fact it was only in 2004-05 Union Budget that, then Finance Minister P.Chitambram has done away with LTCG.

What are equity linked investment?

Direct stocks and all equity based mutual funds will come under the purview of LTCG.

So with LTCG now being applicable, what we must review again has been discussed here…

#1.1 What is the definition of “Long Term”

Suppose you bought an equity investment today.

If you sell it for profit after 12 months from now, the profit portion will be the long term capital gain.

The capital gain portion of your investment will be charged with 10% LTCGT.

#1.2 All gains/profits arising from LTCG will be taxed?

No. Capital gain upto Rs.1.0 Lakhs will not be taxed.

The gains made beyond the value of Rs.1.0 Lakhs will be taxed.

This is one reason why I believe, imposition of LTCG will not affect the small investors much.

#1.3 What will be the quantum of LTCG Tax?

All capital gains beyond the limit of Rs.1.0 lakhs will be taxed @10.4%.

Yes, the net effective LTCGT is 10.4%, and not 10% (Cess of 4% on LTCG_10% will also be applicable).

But all capital gain accrued till 31-Jan’2018 will be exempted from LTCG.

This is another big reason why LTCG will not affect the small investors unreasonably.

I personally feel that introduction of 31-Jan’18 cut-off date is a very thought after decision.

Not able to understand how it is beneficial for us? Do not worry, we will understand it better when we will be do the calculations…

#1.4 How LTCG will be calculated?

This is slightly tricky. Hence I will kindly ask you to give special attention to the calculation part.

There are two steps of the calculation

1. LTCG calculation considering standard deduction of Rs.1.0L.
2. LTCG calculation also considering date factor of 31-Jan’2018.

We will try to understand both with a simple example.

#1.4.1 LTCG calculation – Standard deduction of Rs.1.0L:

Suppose you bought a share at market price of Rs.500,000 in Aug’2016 and sold it today at Rs.650,000.

There are two things to be noted here. As on today (Feb’2018):

1. Investment holding time is 18 months. As it is more than 12 months, LTCG Tax will be applicable.
2. Total Capital Gain is Rs.150,000 (Rs.6.5L-5.0L)

In normal case, the above capital gain will be taxed as shown in table:

This will also be applicable for LTCG Tax calculation for purchases made after 31-Jan’18.

But in Union Budget, it is said that capital gain accrued till 31-Jan’18 will not be taxed.

So how this factor should be taken in consideration for LTCG calculation?

Lets see how…

#1.4.2 LTCG calculation – Gain after considering 31-Jan’2018 factor:

Here, important is to establish what is the investment cost. If this can be answered, balance calculation will be easy (as in #1.4.1).

To establish investment cost, use the below formula in excel:

Investment Cost = MAX { Actual Cost, MIN [Value on 31-Jan’18, Actual Sale Value] }

Case#1

• Actual Cost = Rs.500,000
• Actual Sale Value = Rs.650,000
• Value on 31-Jan’18 = Rs.600,000

Investment Cost = MAX { Actual Cost, MIN [Value on 31-Jan’18, Actual Sale Value] }

= MAX { 500,000, MIN [600,000, 650,000] }

= MAX { 500,000, 600,000}

Investment Cost = 600,000

Though the actual investment cost was Rs.500,000, but with above formula, the investment cost came much higher as Rs.600,000.

Hence the capital gain (after standard deduction) came much lower (zero). Hence tax payable as per LTCG Tax rule was also zero.

Case#2

• Actual Cost = Rs.500,000
• Actual Sale Value = Rs.750,000
• Value on 31-Jan’18 = Rs.600,000

Investment Cost = MAX { Actual Cost, MIN [Value on 31-Jan’18, Actual Sale Value] }

= MAX { 500,000, MIN [600,000, 750,000] }

= MAX { 500,000, 600,000}

Investment Cost = 600,000

Though the actual investment cost was Rs.500,000, but with above formula, the investment cost came much higher as Rs.600,000.

Hence the capital gain (after standard deduction) came much lower (Rs.50,000). Hence tax payable as per LTCG Tax rule was only Rs.5,200.

Case#3

• Actual Cost = Rs.500,000
• Actual Sale Value = Rs.450,000
• Value on 31-Jan’18 = Rs.600,000

Investment Cost = MAX { Actual Cost, MIN [Value on 31-Jan’18, Actual Sale Value] }

= MAX { 500,000, MIN [600,000, 450,000] }

= MAX { 500,000, 450,000}

Investment Cost = 500,000

Simple calculation explaining the impact of LTCG Tax @10%

#1.5 What happens to STT (Security Transaction Tax)?

It must be noted that LTCG Tax has not been levied for the first time in India.

Before 2004-05, LTCG Tax was applicable.

But when LTCG was removed in 2004-05, STT was introduced (0.025% to 0.1%).

Now, when LTCG Tax has been introduced again, STT was not removed.

It means, LTCG Tax and STT both will be applicable henceforth

#2. Dividend Distribution Tax (DDT) – 10%

Imposition of DDT was only obvious after LTCG Tax was made applicable.

If not, clever investors would have shelve traditional equity, and switched to dividend plans of mutual funds.

As dividends plans of mutual funds were not taxable in India, would have attracted investors after LTCG Tax regime.

To prevent this, DDT of 10% has also been introduced.

Who pays DDT?

It is the responsibility of the mutual fund houses to pay DDT to the government.

Hence, the fund houses will deduct the same before distributing dividends to its unit holders.

Fair enough, to balance Long Term Capital Gain Tax (LTCG), DDT has been imposed.

But LTCG is applicable only for values beyond Rs.1.0 Lakhs. What about DDT?

DDT will be applicable on every penny.

Debt based Mutual Funds which pay regular dividends are already familiar with DDT. Not the same rule is applicable on equity based mutual funds as well.

What to Conclude from Budget 2018?

Frankly speaking, common men can do little with Long Term Capital Gain Tax (LTCG tax) and DDT.

I know there will be people who would like to flee the equity market in despair. But this is not a solution.

Not that I welcome what this Union Budget 2018 has done with the investment, but actually we have no other choice.

There are no other investments around which can match the fundamentals of equity.

What options we have?

1. Bitcoin (take your own call).
2. Fixed Deposits – it will never match equity, even after LTCG tax.
3. Debt based mutual funds – no match for equity.
4. Gold – even this cannot match equity’s returns.

It will not be wrong to say that common men may feel helpless here. They have no other choice but to take LTCG Tax and DDT with a pinch of salt.

But having said that, I would also like to thank Mr. Arun Jaitley for his following due considerations:

• Capital Gain Calculation to be considered only after 31-Jan’18
• First Rs.1.0 Lakhs no to be considered as capital gain.

If these would not have been there, I suppose the equity market would have crashed 10,000 in a day. I know it is a wild guess, but the market would not have absorbed

[P.Note: On 01-Feb’18, Sensex was trading at 36,200 points. Today, 4 days after union budget 2018, Sensex is trading at 34,800 points. This is fall of 1,400 points in matter of 4 days. ]