In simple words, a capital gain is defined as the gain or profit earned upon the sale of a capital asset. The profit made comes within the range of ‘income’, and so it becomes taxable. One needs to pay tax for that amount in the same year in which the transfer of the asset takes place. This is called capital gains tax, which can be short-term or long-term in nature.
In the Union Budget 2018, long-term capital gains tax on profits arising from the sale/ transfer of listed equity shares exceeding ₹1 Lakh at 10%, with no indexation benefit was re-introduced. However, all accrued profits up till 31st January 2018 were exempted from this tax. If equity investments are sold before 12 months, the returns on them are treated as short-term capital gains and taxed at 15%. All other assets, if sold before 3 years, the returns on them are taxed as short-term capital gains.
The classification for a Long-term capital gain (LTCG) varies from instrument to instrument. If equity investments are sold after 12 months, the returns on them are treated as long-term capital gains. On the other hand, for real estate, a holding period of 2 years is considered long-term. Meanwhile, debt-oriented mutual funds, jewellery and other assets are required to be held for 3 years before they are considered long-term.
How the new capital gain tax can impact your portfolio
An important point to take into consideration now is how it affects investors. Besides the return potential, equities pulled in investors because of tax-free gains as they have enjoyed exemption till now. However, LTCG changed all that. Experts believe that LTCG of 10% lowered the relative attractiveness of equity as an asset class and dampened the spirits of investors that were actively buying equities. At the same time, it increased the relative attractiveness of ULIPs, which remained outside the ambit of LTCG tax. This allowed ULIPs to be among the few market-linked instruments to be outside the purview of the LTCG tax.
As compared to debt funds, the attraction towards equity has lessened to a large extent because its tax advantage is now relatively gone. While LTCG tax is 10% without indexation for equities, it is 20% for debt funds with indexation benefit. But, equities can become appealing if their returns are higher.
However, it has also led to some positive outcomes. With the re-introduction of this tax, there is better uniformity in India’s tax treatment of LTCG from equities with other countries and improved integration of Indian markets with global ones