Long-Term Capital Gains.

                            

• LTCG or long-term capital gains refer to the gains made on any class of asset held for a particular period of time. In case of equity shares, it refers to the gains made on stocks held for more than one year.
• In other words, if the shares are bought and held for more than a year before selling, then the gains, if any, on the said sale are referred to as long term capital gains or LTCG.

Why is LTCG tax in the news?

• The Centre’s decision to bring back the long-term capital gains tax (LTCG) on equities, which was scrapped in 2004-05
• Finance Minister Arun Jaitley re-introduced LTCG tax on equity shares. Investors have to pay 10% LTCG tax on gains exceeding ₹one lakh on the sale of shares or equity mutual funds held for more than one year.
• Previously, Short-Term Capital Gains (STCG) tax of 15% was levied.

Advantages

• One, it corrects, somewhat, the prevailing imbalance on market investments because though investment instruments are taxed gains from holding shares for long are not. Even short-term capital gains – money made by selling shares after holding for less than a year – are taxed at 15%.
• Two, investors who park wealth in the stock markets would be encourage to deploy the capital in ways that are more economically productive, say, in manufacturing activities.
• Three, it makes the government seem a little less pro-rich, little more benevolent towards the no-so-rich as much of the capital gains are collected by corporates, not individuals.

Issues

• The introduction of LTCG tax can only increase the cost of trading stocks at a time when various market participants have been highlighting the ‘export of capital’ to other countries due to lower transaction costs in those nations.
• It will hit the average middle class investor. This might serve to improve liquidity in Indian markets and add to the government’s revenue, it is also likely to discourage to some extent the growing culture of investing in equities for the long run
• The Securities Transaction Tax (STT), which was introduced in lieu of the LTCG in 2004 and penalises the buying of stocks for purposes other than just intra-day trading, has been left untouched by the government.
• The double whammy of the STT and LTCG will further privilege short-term trading in stocks over long-term investment. Being the only country in the world to impose both the STT and LTCG, India is also likely to become a little less attractive to foreign investors when compared to its peers.