Who loses or gains from this Budget’s LTCG tax change?

Are you feeling worried that the Budget has increased the tax on

capital gains

from

stocks

and equity funds? While the higher tax will certainly be a damper for

investors

with large portfolios, those with smaller portfolios may actually gain from the proposed change. If the long-term capital gains from stocks and

equity funds

are up to Rs 2 lakh in a financial year, your tax liability will now be lower.

That’s because even though the tax rate for

long-term gains

has been hiked from 10% to 12.5%, the exemption threshold has also been raised from Rs 1 lakh to Rs 1.25 lakh.
This increase in exemption means those with gains of Rs 1.25 lakh in a year will save Rs 2,600 in tax. This gain in tax progressively reduces as the gains increase. However, even investors with gains of up to Rs 2 lakh in a year will pay less tax. The inflection point comes at Rs 2.25 lakh. If the gains exceed Rs 2.25 lakh in a year, the tax liability will be higher than before (see table).
One way investors can avoid the tax is by harvesting tax-free long-term gains of up to Rs 1.25 lakh every financial year. Sell some of your stocks and equity funds purchased more than a year ago so that the gains are within the Rs 1.25 lakh tax-free threshold. The same securities and funds can be repurchased immediately thereafter. This simple exercise will not only help you pocket tax-free long-term capital gains but also reset the purchase price of the securities at a higher level, thus reducing the tax when you sell these shares at a future date. Do this even if you intend to hold your equity investments for the long term.
Investors should ensure that they maintain the equity allocation in the portfolio when they harvest long-term gains. Selling off equity investments and not repurchasing them might change your asset mix and leave you with a lower than desired equity exposure.

Though investors with long-term capital gains have the opportunity to avoid tax, those with short-term gains have no solace. The Budget has increased the tax on short-term gains from 15% to 20%. For every Rs 1 lakh gain, the investor will shell out an additional tax of Rs 5,200. Arguably, this is not a negative step, because the higher tax will make short-term trading and speculation less attractive and discourage punters and day traders. It could also make investors take a longer term view and remain invested for at least one year to escape the high tax.
The author is
Managing Director of MyMoneyMantra.com. Views are personal