Long Term Capital Gains (LTCG) tax on shares is insignificant in our view. Why do we say so?
Read and find out below.
Indian equity tax system is not flawed. It’s just messed up! No, we’re not criticizing the present government or the past ones in particular. We’re just saying that multiple tax deductions without much value addition make no sense at all. This is just logical. Isn’t it?
You would have heard manier times that India doesn’t invest in equity like the world does. In fact, the global average of investing in stock market is close to 40% whereas in India it is hardly 3%! Besides people’s perception that stock market is a risky ball game, the aforementioned issue adds to potential investors’ woes.
What is the Current Tax Structure?
The LTCG tax rate is currently taxed at 10%. This wasn’t the case an year ago (ltcg tax rate was announced in 2018). The tax on Short Term Capital Gains (STCG) are taxed at 15%. These Long Term Capital Gains and Short Term Capital Gain slabs are applicable for equity-oriented schemes.
Besides this, there’s a Securities Transaction Tax (STT) that’s levied on sell transactions. Also, there’s a Dividend Distribution Tax (DDT) which the companies pay while paying out dividends. So far, so good. But, in the next section we’ll come to the problem.
About LTCG Tax on Shares
Remember the time when GST was being introduced? Government said that multiple layers of taxes are cumbersome to handle and also they are insignificant. Something similar is happening in case of equity tax structure. Here’s how.
A company pays taxes on its turnover. After that, when it comes to distributing dividends from the leftover part (profit after tax), it has to pay dividend distribution tax. The shareholders are not spared either. When they sell their shares, they pay a securities transaction tax. And, based on their holding period they pay LTCG tax on shares or STCG tax on shares. All this, over the income tax that they pay (depending on slab).
What can be Done about LTCG tax rate?
Let’s get back to square. We started from the point that equity investing is not popular in India. Now, it is clear from the situation that taxation is another factor which adds to the investors’ or even potential investors’ woes. So, to make investing more attractive and rewarding, one step which the government can surely take is ‘Completely Removing’ LTCG tax on shares.
Long term investing needs to be promoted, otherwise the stock market will continue to be perceived as risky and unattractive. In order to promote the value investing or long term investing, LTCG tax on shares' abolition will play a very important role provided the government thinks the same way.
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