Capital asset, according to section 2(14), mean the property of any kind held by an assessee, whether or not connected with his business or profession, any security held by a Foreign Institutional Investor (FII) which was invested in such securities in accordance with a regulation made under the SEBI Act, 1992
Type of Capital Gain
- Long term Capital Gain
- Short Term Capital Gain
From 1st April 2018, the long term capital gains (LTCG) on the sale of equity shares have been made taxable. In the case of equity, long-term capital gain refers to the holding period of more than 1 year from the purchasing date.
Before 2018, investors could save tax on the LTCG earned on the sale of equity shares under the then prevailing Indian tax system. The idea behind keeping LTCG tax free was to increase investor participation in the equity share markets. To avail the exemption, the investors began viewing equities as a favorable investment, as is evident from the growth of mutual fund portfolios from 1.37 crores to 6.65 crores in 2017.
Long Term Capital Asset is an asset that is held for more than 36 months. The reduced period of 24 months will not apply to the movable property assets such as debt oriented mutual funds and jewelry as they will only be classified as long term capital assets if they are held for 36 months.
The following assets, which are held for more than a period of 12 months, will be considered as a long-term capital asset:
- Units of UTI
- Equity oriented mutual fund
- Securities such as government securities, bonds, and debentures
- Zero-coupon bonds
- Preference shares or equity in a company that is listed on a recognized stock exchange in India
Who has to pay LTCG?
The long term capital gain tax applies to all the profits from the sale of assets, including equity, property, mutual funds, and gold. The assets should be useful for more than one year from the date of purchase.
Equity and mutual funds, as short term capital assets, are taxed at 15%.
The long term capital gain tax is geared at promoting long term investments. This, in turn, encourages one to hold their securities for a more extended period.
Impact of Budget 2020 on Long Term Capital Gain
According to Budget 2020, the financial experts advised not to pay too much attention to the introduction of long term capital gain tax beyond a certain point. From an investment point of view, it is always better to focus on the goals and risks while choosing mutual funds in a financial portfolio.
However, the proposal of long term capital gains tax on equity funds will affect the returns as they will be lower than expected,
For example, the equity-linked savings scheme (ELSS) could lose the tax-free status and also its importance amongst investors who viewed it as a tax saving option.
At the same time, equity funds will also be exempted from the indexation benefit, increasing the discrepancy between equity and debt schemes, making the latter more attractive for investors.
At the same time, long term capital gains tax of 10% is applicable on equity shares of more than Rs. 1 lakh, that too without the benefit of indexation, as per Budget 2020.
However, don’t let the long term capital gains tax affect your investment decision just yet as the capital gains earned before 31 January 2018 will continue to remain tax-free.
It is also worthy to note that as per the new budget, a dividend distribution tax of 10% has been proposed on equity mutual funds. While the dividend will continue to remain tax-free, the return on equity funds will reduce.
Ways to Minimize LTCG Tax Liability
The long term capital gain tax makes options like public provident fund and Unit Linked Insurance Plans more attractive than ELSS funds as tax saving instruments, these options will continue to be tax-free, while the ELSS fund will be taxed at @ of 10%.
ELSS funds offer superior returns in the long run than other asset classes over a long period. Thus, they continue to be the best option when it comes to creating a corpus of funds to meet long-term financial goals, their post-tax returns are still higher than PPF and ULIPs, making them a lucrative option of investment.
Low-cost ULIPs are available online directly by insurance providers such as Max Life Insurance that provide returns similar to ELSS.
ELSS funds are still a good investment option as far as tax-saving benefits of Income Tax Section 80C are concerned, besides, they have the shortest lock-in period of 3 years among all the instruments that fall under section 80C of the Income-tax section.
After the budget 2020 announcement, mutual funds become a highly recommended plan by financial advisors for their higher taxable returns than the low-performing tax-free assets.
In the end, financial experts advise that one should always include inflation and taxes when one is determining their target corpus to achieve long-term goals. However, mutual fund advisors believe that budget 2020 will adversely affect the popularity of Equity Linked Savings Scheme and formulate tax saving mutual funds more preferably.