The Budget 2018 has made a huge impact on the stock market in the country. Finance Minister ArunJaitley announced a long-term capital gain tax on the sale of shares. Any gain from investing in stock market and equity mutual funds will be taxed at 10% on the amount exceeding INR 1 lakh. Under the current tax regime, the profit from stock and equity mutual fund investments, which were held for more than a year was exempt from tax.
What is a capital asset?
Capital asset is any property, movable or immovable, which is held by a person. It can include land, house, securities, building, vehicles, jewelry, machinery, patents, and trademarks.
What is not a capital asset?
The below mentioned items are not considered as capital assets.
- Stock in trade, raw material, and consumable stores held for the purpose of business or profession
- Agricultural land in rural area
- Gold deposit bonds under theGold Deposit Scheme 1999
- Personal items like furniture and clothing held for personal use
- National Defence Gold Bonds, 6.5% gold bonds, 7% gold bonds, and special bearer bonds
What is a long-term capital gain?
When a capital asset is sold on profit, it generates capital gain, and the tax applicable on the gain is known as long-term capital gain tax. Capital assets that are held for more than three years are considered long term and the gains arising on their sale are long-term capital gains. In case of equity shares, government securities, listed debentures, units of equity-oriented mutual funds, and Zero Coupon Bonds, the holding period for calculating capital gain is considered one year instead of three years.
The short-term capital gain tax applicable on the investments held for less than one year is 15%. Investors were under a shock when the budget introduced a 10% tax on the gain on sale of stocks. It led to volatility in the market and the brought down the sentiments of the investors. The market eventually picked up pace and has gained momentum again. It is expected that this change will have an impact on the revenue gain amounting to INR 20,000 crore within the first year itself.
The total amount of exempted capital gains from the listed shares and mutual fund unit was recorded around INR 3.67 lakh crore in 2017-18. With the implementation of the new tax law, the Government will gain revenue in the coming years. Debt-oriented mutual funds and preference shares are subject to long-term capital gains. Investors will be required to pay 20% tax with indexation.
The Government also added a ‘grandfathering clause’ under which any gain from the sale of shares until 31st January 2018 would remain exempt. There will be no benefit of indexation on the gain exceeding INR 1 lakh on the sale of securities. This will ensure that those investors who have made an investment considering the current tax regime will remain protected. Any profit booked after 31st March 2018 will be liable for taxation. This clause, however, should not be a reason for investors to sell their shares in February and March.
Investors who are willing to trade and invest in the stock market are required to open a demat account. Companies no longer issue physical certificates on the purchase of securities. The account will allow online trading with ease. Investors can make the purchase and sale of shares without the help of a stockbroker and handle their entire portfolio at one location. It adds to the convenience of investor and makes it easier to manage investments. It is a one-time procedure thatreduces the chance of theft and robbery. The shares can be immediately transferred and there will be no stamp duty on the transfer of the same. Investors can do away with the physical certificates and trade online instead. There is also no requirement to sell share with odd lots; investors can now sell as low as one share within minutes. Investors can manage their portfolio from the comfort of their homes.
How to open ademat account:
Investors are required to follow below mentioned steps to open an account.
- Contact a Depositary Participant (DP) who is registered with the Central Depositary Services India Ltd. and National Securities Depository Ltd.
- Provide documents of proof of identity and proof of address
- Sign an agreement with the DP
The process of opening the account is quick and hassle free, thus making it easier for investors to start investing into equity shares.