InvestorQ : Do you see any major changes in the Union Budget on the LTCG tax front or the taxes on buybacks and dividends?
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Do you see any major changes in the Union Budget on the LTCG tax front or the taxes on buybacks and dividends?

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1 year ago
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There have been persistent demands for the scrapping of the LTCG tax and this could be one of the themes of the current Union Budget. Here is what you need to know about the taxation of capital gains and dividends and the likely direction in this budget 2020.

· The securities transaction tax (STT) was introduced in 2004 in lieu of the long term capital gains tax. Hence when the LTCG was reintroduced in 2018, the assumption was that STT should be logically dropped. However, that was not done.

· The STT generates over $1 billion each year and is also easy to collect and much simpler to monitor and administer. Hence the STT is likely to continue. The government may look to scrap LTCG tax as it is unlikely to add much value to the flow of revenues and continues to be hard to administer.

· Alternatively, the government may as a mid way solution look to change the definition of long term capital gains on equities to 2 years from 1 year. This would still be acceptable to individuals as the big concern is more towards long term equity fund investors and not towards the traders.

· What about dividends. Today, dividends are subjected to cascading effect of taxes. For example, dividend payments are a post tax appropriation. Secondly, they are subject to DDT at the rate of nearly 20.56%. Finally, when investors receive more than Rs.1 million per year as dividends, it is taxed additionally at 10%. DDT may remain due to its revenue potential but the 10% tax on dividends must go and that can be accompanied by the scrapping of tax on buybacks too.

These are some of the broad expectations from the budget on the LTCG and dividends front. STT is unlikely to be changed in a significant way.



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