Budget 2021: Will govt increase LTCG exemption limit beyond Rs 1 lakh

Union Budget 2021 is expected to come out with one of the most awaited announcements for Dalal Street - big-ticket reforms regarding Long Term Capital Gains (LTCG) taxes, capital market reforms and policies from the financial markets' perspective. Market participants are expecting some relief that could boost investing sentiments and kickstart the capex cycle in the economy.

From a stock markets' point of view, reforming the taxation burden on LTGC and removal of dividend distribution tax have been longstanding expectations of investors. These moves are likely to provide more liquidity in the form of disposable income.

Where some of the experts have stated that the government is unlikely to revoke or abolish taxes to keep up revenue flows, others are of the view that Finance Minister Nirmala Sitharaman's Budget for 2021-22 is likely to increase LTCG exemption limit beyond Rs 1 lakh.

Continuation of LTCG tax along with other transaction taxes - like STT, stamp duty - have already affected investors' confidence. LTCG tax accrued from selling equity shares and equity-oriented mutual funds was proposed in Budget 2018. The LTCG tax plus cess, without indexation benefits, is applicable at a rate of 10 per cent on gains over and above Rs 1 lakh in a financial year.

The Association of National Exchanges Members of India (ANMI) has urged the government to incentivise and encourage equity market investments by streamlining the tax structure applicable for market transactions in the Union Budget for the financial year 2021-22.

The broker's body has asked for an exemption of individual dividend tax liability of up to Rs 10,000 for each listed company to encourage savers to invest long term in equity assets.

ANMI Chairman Pramod Chandra Mody has also sought the increase in LTCG exemption limit beyond Rs 1 lakh.

"From a capital market perspective, key expectations include allowing indexation while calculating LTCG on equity shares/equity MFs and/or allowing setoff of STT against the tax liability thereon, reducing LTCG period to 1 year for debt MF, exempting dividend income in the hand of recipient to the extent of Rs 2-3 lakh per annum," HDFC Securities said in a note.

Considering the pandemic and its impact on the market, a hike in LTCG tax might stimulate positive sentiments for the capital markets this year on the Budget day. Although, as per market analysts, to get a DDT and LTCG relief at the same time looks too ambitious to be true.

The ruling government in the past has always ended up giving thumbs down to market expectations of relief in dividend distribution tax as well as long term capital gains. Last year, optional income tax cuts, confusion about the impact of DDT removal and continuance of LTCG tax led to a crash in Sensex and Nifty on the most important listed economic event of the year.

The long-term capital gains are computed by deducting the cost of acquisition from the full value of consideration on transfer of the long-term capital asset.