THE revised discussion paper on DTC has softened the blow on long-term equity investors. The earlier version of the code had proposed a long-term capital gains tax on sale of long-term investments. If the proposals in the revised draft are implemented, a specified percentage will be deducted from long term capital gains (instead of factoring in the indexation benefit) before adding the same to the individual's income for computing tax as per the applicable slab rate. Compared to the earlier draft, the proposal to deduct a specified percentage from long-term capital gains is a huge relief.
For instance, say you had purchased a stock for Rs 10 in 2000 and the indexed cost of acquisition rose to Rs 20, approximately and you sold the stock for Rs 100 making a gain of Rs 80 (100-20). Under the first draft, the entire Rs 80 will be subject to tax. However, under the revised draft, the long-term capital gain so computed could be just Rs 45, that is, 90 minus 45 (assuming 50% is the specified percentage). Therefore, the newer version will reduce your tax outgo, since the long-term gain will come down from Rs 80 to Rs 45. If your slab rate is 10%, the effective tax rate on this gain will be 5%, as per the revised draft.
The loss from sale of such assets will be scaled down in a similar manner, according to the revised discussion paper. "My view is that the percentage, which is yet to be specified, could be linked to the slab rate, so as to ensure that those with lower incomes benefit more. On the flipside, securities transaction tax (STT) has been reintroduced, which the first draft had sought to It is likely that chartered accountants will advise their clients to sell equity assets whenever there is an opportunity to book profits, before the revised code comes into effect from April 1, 2011. At present, there are no taxes on long-term gains from equity.
Another change is that in the new regime, any equity asset that is held for a period of more than one year from the end of the financial year in which it is acquired will be termed a long-term investment while earlier any asset held for more than 12 months was considered long-term.
The revised draft has offered to provide for a transition regime for tax on long-term capital gains. However, the clarity on this count is yet to emerge. This apart, under the revised draft, non-residents will be treated at par with residents for taxation of such capital gains.
