NEW DELHI: With just over three weeks to go for Finance Minister Arun Jaitley to unveil his fifth Union Budget, years- old fear of re-introduction of long-term capital gains tax on equity investments has returned to haunt investors on Dalal Street.
Market watchers say strong domestic flow to equities in recent months has so far offset foreign outflows and is fulfilling the basic aim of exempting long-term equity investments, which is to promote long-term equity investment. So, the government may refrain from changing it.
But if it does tweak, it would be a negative for Dalal Street, say analysts.
While computing tax on equity and preference shares or equity-linked mutual fund (MF) schemes, an investment of less than 12 months attract short-term capital gain tax of 15 per cent besides surcharge and cess.
But as per Section 10(38) of the I-T Act, gains on equity investment beyond 12 months are exempted from taxes if the securities transaction tax (STT) is paid on the sale transaction.
In case of non-equity MF schemes, the duration to qualify for LTCG is 36 months. If held for less than 36 months, gains on investment in such funds are taxed as per individual tax slabs. The long-term capital gains tax (LCGT) in this case is 20 per cent after indexation.
"My fear is that the government may play around with the exemption on capital gains on equity beyond one year. If it does so, it will really dent the momentum that we see in the equity market," Sanjay Sinha at Founder, Citrus Advisors, told ETNow.
Ramesh Damani, member at BSE, said the market is worrying that the government would reintroduce long-term capital gains tax, but the idea does not make sense if one looks at it from an abstract point view.
"Why was LTCG introduced? It came in to incentivise young investors to come into the equity market. Now that has happened. We are seeing this huge liquidity coming into the domestic markets because of that. Why do you want to take that away when the policy is working? So I am going to believe that North Block will not fiddle with the long-term capital gains tax," Damani told ET Now.
Pankaj Murarka, Founder of Renaissance Investment Managers, said investors may want to get into the Budget with some degree of caution and expects some pre-budget profit taking as many investors are sitting on a lot of profits.
Dilip Bhat of Prabhudas Lilladher said the government has been pretty much conscious and has behaved in a very responsible way as far as the capital market is concerned.
"It does realise the importance of this capital market and despite the fact that we have demonetisation, we had GST and all. The market continues to roar away on the upside. I do not think it will do anything to disturb this particular equation. My own sense would be that they probably will refrain from touching this particular status quo at the moment."