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Scrapping LTCG tops investors' Budget wishlist

While equity-oriented mutual fund investors have to pay LTCG tax, there’s no such tax on ULIPs.

Jan 22, 2019, 08.56 AM IST
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The market regulator has announced the transition of derivatives market to physical settlement by September 2019.
A relook at Long Term Capital Gains Tax on stocks, bringing tax-saving debt mutual funds and easing rules for Foreign Portfolio Investors are among the key expectations from the next government. Brokers said removal or reduction of LTCG tax on stock could lift investor sentiment, while tax incentives for debt mutual funds could boost flows into the bond market.

Scrap/reduce LTCG tax on stocks
In last year’s Budget, the FM had reintroduced a tax on capital gains from stocks and equity mutual funds if held for more than a year. Now, stock investors have to pay 10 per cent LTCG tax, but earlier there was none. A senior fund manager said the tax outgo would be huge for those holding stocks, or equity mutual funds, for a long time and there’s a case to reduce it significantly. Some brokers said the government is earning money through Securities Transaction Tax, a levy collected by the government. “STT was introduced in lieu of cap gains tax. So, abolish LTCG or reduce STT,” said Alok Churiwala, MD, Churiwala Securities.

Level playing field for equity MFs, ULIPs
While equity-oriented mutual fund investors have to pay LTCG tax, there’s no such tax on ULIPs. “We believe that cost and tax structure for both these products needs to be in sync to enable an investor select suitable products,” said Amit Singh, CEO, Investica.

Debt MF under Section 80C
Wealth advisors believe the government should allow a debt mutual fund category to come under Section 80C which allows individuals in certain products to avail tax benefits. Currently, mutual funds’ equity linked savings plans (ELSS), PPF, banks’ five-year deposits and National Savings Scheme come under Section 80C. “Investors should get benefits under section 80C for debt mutual funds,” said Kaustubh Belapurkar, director (Fund Research), Morningstar India.

LTCG on corporate actions post January 31, 2018
The government had exempted stock gains until January 31, 2018, but the shares that investors got from actions such as stock split, merger and demerger haven’t got any exemption even if the original shares were purchased before January 31. “For example, for new shares received in a merger, the tax law allows the cost and holding period of original shares to be considered on a proportionate basis,” said Rajesh Gandhi, partner, Deloitte India.

Relaxations on FPI Safe harboring rules:
In 2015, the government had introduced safe harbour rules aimed to bring foreign fund managers, based out of countries like Singapore and Mauritius, to India. As per the new rules, an FPI would not be considered to be a resident of India for tax purposes just because its fund manager is based in India. However, this provision was available for only those FPIs which satisfied few conditions including minimum fund corpus and activities carried out by the fund manager.

“Despite providing certain relaxations and clarifications over the past 3 years, some of the conditions are still onerous,” said Suresh Swamy, partner, PWC.

Tax framework for physical settlement
The market regulator has announced the transition of derivatives market to physical settlement by September 2019. However, there’s lack of clarity on STT applicable for such settlements. Exchanges are currently charging 0.1 per cent STT for physically settled contracts while other derivatives are subject to 0.01 per cent tax.

“It is important to clarify aspects such as cost of acquisition, period of holding of shares received or delivered on physical settlement,” said Swamy.
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