Budget 2017: Keep your fingers crossed on long-term capital gains issue

Rajiv GoelBombay Capital ServicesAt the outset let me start by warning you that this is going to be an extremely boring topic for most of you to read. It’s to do with taxes and positioning of your portfolios after possible changes in Budget 2017.As with most things related to government policies and taxes these days I try to read the tea leaves while expecting the worst from south block. So the topic at hand seeks to address the rumours of a three year holding period for eligibility under long term capital gains and how it will impact your investment math.Let’s start by defining capital gains which according to our friends at investopedia is an increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. A capital gain may be short-term (one year or less) or long-term (more than one year) and must be claimed on income taxes. As per income tax Act, the capital asset includes property of any kind. It does not include stock in trade and, personal assets held for personal use such as furniture, utensils, vehicles and wearing apparel. However capital asset includes jewellery. Rural agricultural land is also excluded from the definition of capital asset, only urban agricultural land in specified area is liable for capital gain tax.For taxation purpose under the Indian Income Tax Act the capital asset is divided into two types according to number of years held by a person.• Long Term Capital Asset: Held more than 36 months.• Short Term Capital Asset: Held not more than 36 months.The exception to the above rules are for the following assets which shall be treated as short term capital assets, if the holding period is not more than 12 months.• A security listed in a recognized stock exchange of India• Units of UTI• A unit of equity oriented fund• A zero coupon bondShort term capital gain is taxable @ 15% from transfer of equity share or a unit of an equity oriented fund or a unit of business trust if following conditions are satisfied:• Sale taken place in a recognized stock exchange; and• Such sale is chargeable to security transaction taxThe other short term capital gain shall be taxable at normal slab rates applicable for an individual or a corporate based on his income slab. The long term capital gain is taxable @ 20%. For listed securities the rates of long term capital gain is 20% with indexation. If security transaction tax is chargeable for a listed shares or a unit of equity oriented fund or a unit of business trust, then the long term capital gain arising from such asset is exempted under section 10(38). The long and short of it, the longer you hold an asset, the lesser taxes you are likely to pay.In all the hullabaloo post Mr. Modi’s demonetization, there has been a lot of speculation about whether the upcoming 2017 budget can throw in spinner in your asset allocations and the tax implications on your trading book. While Finance Minister - Arun Jaitley has gone to great lengths clarifying that there is no intention of the government to impose tax on long-term capital gains from share transactions, it is clear that there may be some change in taxation coming. As long as it isn't going to be getting rid of one of the few good features of the current Indian tax system, the absence of a long term capital gains tax on stock transactions, you can breathe easy.That said, be alert as Mr. Modi is definitely wearing his Robin Hood costume for now. Should there be changes to section 10(38) then your portfolio mix specifically your SIP investments will need to undergo a change.