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    No incentive for investors: Cut LTCG to 7.5%, well below short-term rate

    Synopsis

    From the stock market perspective, the most-awaited proposal was the one relating to LTCG.

    tax- bccl
    The FY19 disinvestment target is also healthy at Rs 80,000 crore.
    By Raamdeo Agrawal

    Union Budget 2018-19 comes ahead of key state elections and the general elections in 2019. And yet, Arun Jaitley stuck to the maxim, ‘Good economics is good politics.’ He provided adequately for all the socio-economic sectors – agriculture, health, education, housing and infrastructure, and yet managed to contain 2018-19 fiscal deficit at 3.3 per cent.

    From the stock market perspective, the most-awaited proposal was the one relating to tax on long-term capital gains. It did indeed come, but with a very soft landing. Grandfathering of all capital gains prior to January 31 is a huge relief to all equity investors. However, the tax rate of 10 per cent is somewhat high in my view, especially considering that there are no indexation benefits.

    The rate of 10 per cent is only marginally lower than the rate of 15 per cent for short-term capital gains. Thus, the rate effectively blurs the distinction between long-term and short-term capital gains.

    In other words, there is no great incentive for investors to hold equities and/or equity mutual funds for a period longer than a year. I would urge Jaitley to consider this, and bring down the tax rate to 7.5 per cent, so that it is meaningfully lower than the rate for short-term capital gains.

    To me, the other major highlight of the Budget was a semblance of a strategy to consolidate and capitalise on government’s assets. Against the 2017-18 disinvestment target of Rs 72,500 crore, the actual is expected to end up at Rs 1,00,000 crore, on the back of the HPCL stake sale to ONGC.

    The FY19 disinvestment target is also healthy at Rs 80,000 crore. Further, the decision to merge three public sector general insurance companies is also a landmark one, and a potential precursor to many such moves, especially among public sector banks.

    Arguably, the only strategic dissonance is the imposition of 1 per cent additional health and education cess, quite contrary to Jaitley’s promise of lowering corporate tax to 25 per cent.

    Finally, from a personal perspective, the biggest beneficiary of Union Budget 2018-19 is the mutual funds sector. With direct equity coming under the purview of long-term capital gains tax, mutual funds, especially growth oriented schemes, emerge as the preferred vehicle for investors to play the equity markets.

    (Raamdeo Agrawal is Joint MD, Motilal Oswal Financial Services. Views expressed are personal)



    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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    (What's moving Sensex and Nifty Track latest market news, stock tips, Budget 2024 and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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