Hike in short term capital gain tax disappointing

Find out all about the budget and how it affects your pocket, that too, minus the jargon. Get tips from experts on what you can do now. Also meet people like you and find out what they think about the budget.Here we spoke to Kishore, a retail investor.

Name: Kishore V

Age: 26

Industry: Software

Income: Rs 450,000 per annum (gross)

Tax deducted at source: Rs 6000 per annum

Investments: Annual premium of Rs 40,000 in ULIP and Rs 25,000 in ELSS

Debts: housing loan - Rs 144,000 per annum

Loan amount: Rs 12 lakh for 20 years

What happened in the budget for him?

The measure: Short term capital gains tax on equity shares and equity oriented mutual funds increased to 15%.

The impact: This tax was earlier at 10%. This will discourage retail investors from investing for the short term. If Kishore sells shares within one year from buying them, he will have to pay tax at 15% on the gains.

The measure: Permanent Account Number (PAN) extended to all financial markets.

The impact: Currently investors have to quote their PAN only for transactions in the stock market or while buying and selling mutual funds. Now they will have to quote PAN while buying insurance, postal schemes, bank deposits, bonds etc.

The measure: Securities Transaction Tax (STT) restricted to options premium only.

The impact: If Kishore is are a player in the derivatives market, he will now pay STT only on the option premium.

The measure: Service tax on the Asset Management Company that manages unit linked insurance plans (ULIP)

The impact: Since Kishore has bought a ULIP, he will now have to pay service tax of 12.36% on the investment portion. Till now, he paid service tax only on the risk cover portion. This means, he will pay more as premiums.

The measure: Postal term deposits to be included under section 80C

The impact: Investments in postal term deposits schemes will now get investors a deduction of Rs 1 lakh under section 80C. This however is included in the overall limit of Rs 1 lakh for that section.

What is his reaction?

“I am not really excited. There was no need to increase Short Term Capital Gain (STCG) tax from 10% to 15%. But now that the Finance Minister has increased the STCG tax, he could have at least removed STT.”

What should he do now to plan his money better?

-          Chartered accountant Shailesh Haribhakti puts it very aptly, “The budget has been absolutely delightful. For retail investors I would rate it 6.5/10. Investors will have a serious opportunity to invest in debt instruments. The biggest downside is the hike in the short term capital gain. But it may be positive aspect for investors since they will be encouraged to hold the shares for a more than a year.”

-          Since tax on short term capital gain on equity shares and equity oriented mutual funds has increased, it would be wise to start investing in these instruments for the long term. In any case, equity instruments give the best results when held for the long term.

-          Although she can invest in postal term deposits to get a deduction, he must consider instruments like equity linked savings schemes, the returns of which are more tax efficient. ELSS is also good from a long-term wealth creation point of view. Alternately, he can look at public provident fund schemes that give tax-free interest.

Want to know what Kishore had expected from the budget? Read this:  I want STT to be lowered