3 min read.Updated: 25 Feb 2016, 12:32 PM ISTAmi Shah
Markets fear Budget may raise holding period for equities to qualify as a long-term capital asset from one year to up to three years
Mumbai: The fear that the finance minister may raise the holding period for equities to qualify as a long-term capital asset from one year to up to three years in the Union budget on 29 February has made market participants nervous.
The move will likely hit traders and institutional investors more than it does retail investors, although it could deter retail investors from investing in equities, an asset class they already shun.
If the change is made, it will mean that long-term capital gains (LTCG) tax will be applicable to stock market holdings even after a year and the gains will be exempt only when equities are held for at least three years.
Market participants say the move could further discourage retail investors from entering the equity markets.
Retail investors are vastly under-invested in equities in India, with gold, real estate and bank fixed deposits garnering the lion’s share of their investments.
In a newsletter dated October 2015, BNP Paribas Investment Partners said that equities represented less than 3% of Indian household’s total assets, which stood at $6.8 trillion.
Last month, a report by the Press Trust of India reported Prime Minister Narendra Modi as saying that exemptions on share trading and dividends were, in effect, a subsidy for the rich. This triggered fears that the Union budget may facilitate equities to be treated at par with debt for calculation of capital gains tax.
“We must ask ourselves whether this difference in language also reflects a difference in our attitude? Why is it that subsidies going to the well-off are portrayed in a positive manner?" Modi was quoted as saying.
Modi said the total revenue lost due to incentives to corporate taxpayers was over ₹ 62,000 crore, while dividends and LTCG on shares traded on stock exchanges are totally exempt from income-tax even though stock market investing is a rich man’s game.
Under the current norms for LTCG tax, there is zero tax if shares listed on recognized stock exchange or units of equity mutual fund are held for more than a year, provided securities transaction tax (STT) has been paid on the same.
This move was introduced to boost the participation of retail investors in the stocks markets, and the current fear is that the period could be raised up to three years.
“This should not even be considered. It is an extremely retrograde step. It will put us back by 10 years in equity industry," Jayant Manglik, president of retail distribution at Religare Securities Ltd, said referring to the probable rise in the holding period.
“It is like shooing away investors, when actually attracting them should be the idea," added Manglik.
According to him, for economic growth to accelerate over the next 10 years, Indian companies will need money in the form of equity and debt.
“It (an increase in the holding period) will hurt the sentiment of retail investors," said Nitin Bhatia, a Bangalore-based personal finance consultant.
A few, however, dismissed this as usual fears that float in the market before the budget, and said the likelihood of such a change was not high.
“Specifically before the budget, it is usual to have market chatter of this sort. The probability of something like this happening is very low, given the repercussions," said Hemang Jani, senior vice-president of the advisory desk at retail-focused brokerage Sharekhan.
Up to 30 September 2004, LTCG was taxable at 20% of indexed cost, Bhatia said.
Currently, if shares or units of mutual funds are sold before a period of one year, they are taxed at 15%, provided STT is paid.
There is also speculation that STT may be done away with.
In some countries, long-term capital gains are taxed largely at a lower rate than usual, while in some, the concept of capital gains doesn’t exist.
In the US, barring certain exceptions, the tax rate on long-term capital gains is lower than the ordinary income-tax rate, and in some tax brackets there is no tax on such gains. Short-term capital gains are taxed at the standard income-tax rate.
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