The market is now ready to factor in the implications of an increase in capital gains tax.
Investors and fund managers feel there is a high chance that the definition of short-term will now be increased to two or even three years and anybody selling equities within this time frame may be taxed at 15 percent.
This will bring listed and unlisted stocks at a par in terms of taxation. Budget 2016 had brought down the holding period of unlisted equities to two years from three to benefit investors who want to sell unlisted equities without holding it for more than three years.
While day traders are worried about this move and expect the market to fall, most long-term investors and mutual funds want to concentrate on macro and fundamental aspects of the economy, which plays over the long-term.
They feel that this move will be good for the market as it will attract sticky capital. “We feel that more investors will be coming into mutual funds with this move. Besides, the average holding period of stocks for mutual funds is closer to five years. This move is good for long-term investing”, says A Balasubramanian, CEO, Birla Sun Life Mutual Fund.
While investors in equity mutual funds may have to hold equity for more than two years to avoid taxation under the new regime, mutual funds as a structure do not attract short-term tax even if they buy or sell equity within a year.
The media is speculating that Budget 2017 is not going to be silent about taxing equities especially for short-term traders. The finance ministry has gone to great lengths to say that the government doesn’t have any intention to tax stock market transactions but there is a belief among traders that the government may tax equities and bring it closer to other capital assets like real estate.
The long-term capital gains tax for real estate is at 20 percent with indexation benefits and short-term capital gains (where the holding period is below three years) is a flat 20 percent.