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Equity – Shall I Sell or Hold?

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Sensex, companies, market cap, loss

Stock Exchange is the instant barometer for checking worth of any economic development or for that matter, a Union Budget

Weeks ahead of presentation of the Union Budget, 2018, fears were expressed that tax free regimen for long term capital gain (LTCG) from listed shares and equity oriented mutual fund units may be eclipsed. And the nightmare became reality when the Finance Minister, during his Budget speech, made announcement for withdrawal of tax exemption for LTCG for these class of assets.

BSE Sensex, a day ahead of budget presentation, closed at 36033. On the Budget day Sensex opened at a higher stage on – 36064. Thereafter, as the proposals were being unfolded its journey started increasing – 36105, then 36169, then 36193. Thereafter, announcement for of abolishing tax free status for LTCG on shares and units surfaced and the Sensex plummeted to 35517 i.e. whooping decline of 300+ points. However, later it recovered and closed at 35906 – a small decline of 58 points. NSC index also travelled from 11049 to a small loss of 11016.

The income tax law provided concessional tax treatment to gain of sale of listed shares and equity oriented mutual fund units. For short term capital gain - STCG (sale within 12 months of acquisition) tax rate is 15%. For LTCG, there is complete tax exemption. Now the LTCG has lost shield of tax exemption. Therefore, investors and taxpayers are confronted with a question: should I hold shares or dispose of?

In order to address this question, let’s consider the proposal of change and the future of market indices.

Change in LTCG

The STCG from listed shares and equity oriented mutual fund units taxed at the rate of 15% and there is no change in this provision. So it will suffer similar taxation.

However, tax exempt status has been withdrawn and it shall suffer tax at the rate of 10%. LTCG up to Rs. 1.00 lakh continue to be tax free.

Further, the new provision also proposes to provide the following:—
i) The long term capital gains will be computed without giving effect to inflation indexation in respect of cost of acquisitions and cost of improvement, if any, and the benefit of computation of capital gains in foreign currency in the case of a non-resident, will not be allowed.

ii) The cost of acquisitions in respect of the long term capital asset acquired by the assessee before the 1st day of February, 2018 , shall be deemed to be the higher
of –
a) the actual cost of acquisition of such asset; and
b) the lower of –
(I) the fair market value of such asset; and
(II) the full value of consideration received or accruing as a result of the transfer of the capital asset.

The new law shall apply for sales made and gain earned on or after April 1, 2018. So, if one sells shares till March 31, 2018, it will continue to enjoy tax exemption. So, what decision should be taken?

Ahead of presentation of Budget, Economic Survey 2017-18 was presented. It has
estimated GDP growth for the country at 6.75% and predicted growth rate between 7% and 7.5% for the coming fiscal. This rate of GDP growth is the fastest growth rate globally.

No wounder, the global investors, Foreign Institutional Investors are investing in Indian Stock markets. Returns that expect are far better than what their investments earn elsewhere. The confidence of these wealthy investors is growing because of robust and transparent stock exchange and depository system. Indian corporate under obligation to uniformly follow internationally recognized accounting standards and quarterly presentation of results fortifies this faith.

Gains earned with reference to highest market quote on January 31, 2018 will continue to be tax exempt. This is so, whether you sale the securities till March 31, 2018 or thereafter.

Therefore, merely because of proposed change in income-tax law, there is no need to hurry up and sale the investments.

If because of reasons poor financial results, industry not doing well or personal needs, etc. are the reasons of sale, one can go ahead with the decision. However, change in tax law change cannot be a factor having any bearing in decision for
selling or holding of shares and units.

- Chandrashekhar V. Chitale (CA)

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