Changes in LTCG

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The Budget has unleashed havoc in the stock markets by reintroducing the tax on long-term capital gains from stock and equity funds. The Sensex tanked by nearly 840 points on Friday due to widespread selling pressure. Analysts say this will continue as investors try to book profits before the LTCG tax comes into effect in the new financial year starting 1 April. 

The good news is that the tax has a very liberal threshold and will apply to long-term gain beyond Rs 1 lakh. Small investors with a ortfolio of `10-15 lakh will not have to worry. Even big investors can avoid the tax by keeping an eye on the calender. 

Even so, the big fear is that the sharp decline in stock prices could make new investors jittery. Small investors have taken to mutual funds in a big way in recent years, adding over two crore new folios in the past two years (70 lakh in 2016 and 1.4 crore in 2017). Nearly Rs 1,50,000 crore has flown into the equity markets through mutual funds in the past one year. Investors are pouring in nearly Rs 6,200 crore every month into equity funds via SIPs. This liquidity has helped the markets climb new peaks in recent months, but a sustained decline in stock prices could arrest the inflows. 

The other danger is that investors will be lured by distributors of other products such as Ulips and traditional insurance policies. Being insurance products, the income from these plans are not taxable under Section 10(10d). Ulips have changed for the better after the insurance regulator capped charges in 2010, but traditional insurance plans continue to have very high charges. Their returns are barely 4-5%, but if stock markets are down and LTCG are taxed, insurance agents will be able to will be able to palm off these plans to investors. "It will be open season for insurance agents 

 

 

 

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