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Stock market crash: An ill-timed LTCG may have added fuel to fire

There is no real gain from the grandfathering clause if stock itself crashes by a huge margin even if there are gains, which will be taxed at a later date and hence leaving investors with lower gains in hand

The S&P BSE Sensex saw deep cuts in trade on Tuesday following a sharp crack on Wall Street. This followed an intraday drop of nearly 300 points on the Sensex just a day earlier due to worry over implementation of long-term capital gains tax (LTCG).

Finance Minister Arun Jaitley reintroduced tax at 10 percent on capital gains exceeding Rs 1 lakh on sale after April 1 with grandfathering clause on gains accrued up to January 31, 2018.

While experts hint LTCG dampened sentiment, Revenue Secretary Hasmukh Adhia said it was clearly not the reason that triggered the sell-off.

Experts also suggest there is no real gain from the grandfathering clause if stock itself crashes by a huge margin even if there are gains, which will be taxed at a later date, leaving investors with lower gains in hand.

For example, if an investor bought a stock at Rs 100 more than a year ago which was priced at Rs 130 on January 31. If the investor feels that the stock could fall from here but still stay above Rs 100-level, he might lose the incentive to keep the stock as he will have to pay LTCG on gains made post January 31.

On Monday, CBDT clarified some of the concerns of investors in a set of frequently asked questions.

Under the existing regime, long-term capital gains (LTCG) arising from transfer of long-term capital assets, such as equity shares or unit of equity oriented fund or a unit of business trust, is exempt from Income-Tax.

However, transactions in such long-term capital assets are liable to securities transaction tax (STT), which will stay as is.

While experts say there is no fundamental reason for global market’s fall, in India, an ill-timed LTCG may have added fuel to fire.

India Union Budget 2018: What does Finance Minister Arun Jaitley have up his sleeve? Click here for live Budget 2018 news, views and analyses.
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