BUDGET 2018 - HOW DOES IT AFFECT US

Source: The Hitavada      Date: 05 Feb 2018 10:40:37


 


 

The following is a snapshot of the key Budget 2018 provisions.Capital Gains Makes A Comeback (Of Sorts)!
We start with the big bang measure in Budget 2018 – that of reinstating the long-term capital gains tax regime.
As per the proposals, tax on long-term capital gains on equity and equity MFs will be levied @10%. There is a basic exemption of Rs. 1 lakh below which there will be no tax. Note that this exemption is cumulative in nature (applicable to all equity related LTCG in aggregate earned during the year and not to individual gains).


This LTCG tax has a grandfathering clause (as it is called). This means that to an extent, the tax is prospective and not retrospective.
For calculating the LTCG, the cost of acquisition 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 way it will work is that LTCG on any sale of investments made before 1st of February, 2018 will be split into two. The capital gain earned till 31st of January, 2018 will be exempted from tax. The rest of the gains (from 31st January till date of sale) will attract tax at the flat rate of 10% without indexation.
If the sale price is lower than the cost as on 31st of January, 2018, then in effect, there would be no capital gain.
The following table details the various scenarios that may emerge.


In Scenario I, since the result would be a long-term loss, this loss should be available for set-off against other taxable long-term gain. The point hasn't been highlighted in the general media. Also it needs to be noted that this tax just cannot be saved i.e. there is no provision / deduction available that offers a deduction / exemption from this new long-term tax. Even Sec. 54EC bonds (as explained further on) cannot be used.


The above changes have been made applicable from 1st of April, 2018. This seems to suggest that investors have till March 31st to book their tax-free gains!! Surely this could not have been the intention! For, then it literally becomes a recipe for a massive market sell-off! Watch out for this.


Also, so far as investment decisions are concerned, please note that nothing changes. The reason for this is two fold. Firstly, the tax (as you can see from the table) is applicable basically only to the difference between sale value and the cost as on 31st of January. So a major part of the capital gain would be exempted in any case. So there is absolutely no need to panic or take any hasty decisions.


Secondly, there remains the fact that taxes will always be a part of life - in the long run, one cannot escape this reality. As investors, our objective should always be to optimize and maximize post tax income. As regular readers would know, we have always advocated a long term approach. So at a return of say 15% p.a. over 5 years, the capital would basically double (i.e. the return would be 100% over capital). Out of this 100%, 10% would be tax - still leaving 90% profit on the table. It is this 90% that we aim for - put into this perspective, the 10% tax is of little significance - definitely not something that you need to change the entire your approach and financial planning for!


Now what you can expect is this - the market will tank. That is a given. Because myopic investors who cannot see further than their nose will react to the "perceived" bad news of having to pay tax and launch a frenzied sell off. Our sincere advice would be to step aside and watch this frenzy with amusement. For that is what it would be - an irrational panic driven hysteria. This hysteria will typically play out over the next two months since that is the time one has to avoid the so called 'tax' - if anything, you should use this artificial fall in prices to make some strategic purchases. After all, buy low - sell high is what it's all about.


So much about the markets - now moving on to other provisions.
Dividend Distribution Tax (DDT) of 10% applicable to equity MFs.
So far, equity MFs were exempted from DDT. Now, just like LTCG tax has been introduced, DDT too has been made applicable. Sec. 54EC bond maturity period raised to 5 years
Investment in NHAI / REC bonds within six months of earning LTCG - results in LTCG tax exemption. So far, the lock-in period of these bonds used to be 3 years. Now for bonds to be issued from 1st of April, 2018, the lock-in will be of 5 years. This is good news - an investment in these bonds is akin to saving tax and getting paid for it! We have written on this topic earlier and perhaps in the coming weeks will publish a fresh piece with the reworked numbers.
But on the down side, the scope of this section has been reduced. The exemption would be available only in respect of LTCG earned from immovable property and not from any other asset – in other words, Sec. 54EC cannot be used anymore for say LTCG earned from sale of non-equity or (now equity) MFs / shares etc.


Standard Deduction to employees
A flat Standard Deduction of Rs 40,000 has been introduced in respect of salaries. However, the Rs. 15,000 medical reimbursement and Rs 19,200 (Rs 1,600 per month) of exempted Transport Allowance would no longer be applicable. So essentially, the net difference is of only Rs 5,800. Of course, to those who didn’t get the TA or medical reimbursement, the change would be significant – but means little for others.


Relief for Senior Citizens
Interest income (from savings as well as fixed deposits) up to Rs. 50,000 would be deductible for senior citizens only. For others, the same continues to remain at the erstwhile limit of Rs. 10,000.


Moreover, the limit on medical insurance premium for senior citizens has been hiked from Rs. 30,000 to Rs. 50,000. So these have been the main provisions of Budget 2018. Fair warning – this is from an overall reading of the Budget documents. But as the popular saying goes, the devil lies in the details. Watch this space for updates on this devil.


(The authors may be contacted at
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SCENARIOS I II III
Cost of Acquisition of long term shares 100 100 100
Market price as on 31st Jan, 2018 80 120 150
Sale value anytime after31st March 2018 90 110 200
Taxable Gain -10* 0** 50#
(* 90-100 **110-110 # 200-150)