The government may change the definition of “long-term,” raising the time limit for capital gains tax relief to a minimum of three years from one year at present.
There is, however, no plan to introduce a long-term capital gains tax on stock trading.
A change in the definition of “long-term”, if announced in the budget for 2017-18, could likely prompt millions of individuals who trade in stocks to shuffle their savings portfolio.
Under current rules, gains made on a listed company stock are tax free is the investor exits after a year. The changed definition, however, would imply that investors—both retail and institutional—will have to pay 15 percent tax on the premium or gains made if the stock is sold within three years
If implemented, the revised definition will align the rules closer to many matured economy markets where threshold for “long-term” investment lock-in is set at three years or above.
The new rule could call for a major overhaul of institutional investment portfolio that runs into thousands of crores of rupees. This reallocation can potentially dry out funds for the stock market in the short-term adding to the current volatility.
Last month, finance Minister Arun Jaitley clarified that the Centre has no intention to impose tax on long term capital gains in the stock market.
Jaitley’s clarification came shortly after Prime Minister Narendra Modi said that the contribution to the exchequer by security markets participants is low.
“Those who profit from financial markets must make a fair contribution to nation-building through taxes,” Modi said at an event in Mumbai late last month.
Jaitley later clarified that “this interpretation is absolutely erroneous, PM had made no such statement directly or indirectly. This is not what the PM said, nor is it intention of the government as reported”.
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