Investors would be keenly looking at Budget 2020-21 for changes in the long term capital gains tax on equities. Indications are that the finance minister may announce doing away with the LTCG tax, but could increase the holding period for equities to two or three years to avail the benefits or increase the gain limit from Rs 1 lakh.

Sources said the issue has been flagged by the market participants during the pre-budget meeting with the finance minister, and the changes would spur the capital market in a big way and send a positive sentiment to investors. “The issue is under active consideration and a decision on it could be reflected in the budget,” the sources said.

At present, profits on equity shares sold within one year from the date of purchase attract short term capital gains tax of 15 per cent and profits of over Rs 1 lakh on shares sold after one year attract a long term capital gains tax of 10 per cent plus cess.The government had introduced LTCG on the sale of shares and equity-oriented mutual funds on April 1, 2018.

Besides equities, LTCG is applicable on debt mutual funds. LTCG on debt MF is taxed for holdings of more than 3 years at 20 per cent with indexation benefit.

The sources said the government could surprise the market by increasing the holding period from the much expected two years to three years to encourage investors to be invested for the long-term to avail the benefits.

To encourage small tax payers to invest in the stock market, the government may consider increasing the limit of Rs 1 lakh for taxing the long-term capital gains from the transfer of such equity shares and units of equity-oriented funds.

Analysts said rolling back LTCG will re-energise interest in stocks and the possible extension of holding duration would encourage long-term investment.

“The LTCG of 10 per cent for gains over Rs. 1 lakh which was introduced in 2018-19 may be removed. The holding period for availing LTCG may be raised from 1 year to 2 years. This would by and large be a positive for long-term investors,” Care Ratings said.

“The move could have overall positive impact on market sentiment across foreign and domestic investors,” Sunil Tirumalai of Emkay, said in its research report. Industry chamber CII suggested that the budget should exempt LTCG Tax on equity capital altogether while converging to a single simplified rate of 10 per cent for all other asset classes. “This would encourage investment in risk capital in the economy,” it said.

“Alternatively, if it is not possible to exempt equity capital altogether due to revenue constraints, the government may consider the rate of tax on LTCG to be 10 per cent for all asset classes, including equity capital. Further, the holding period for determination of LTCG could be fixed at 12 months for all asset classes,” it added.

“Ever since long-term capital gains tax of 10 per cent without indexation on profits made above Rs 1 lakh on selling of equity shares and mutual funds were introduced in Budget 2018, the same has not gone down well with industry stakeholders. To infuse capital in the economy and boost investments, Budget 2020 should reconsider this provision,” said Rahul Jain, head-personal Wealth Advisory, Edelweiss.

“There could be two options: either a complete withdrawal of LTCG tax or increase in the threshold limit. Opting for either of these would revive sentiment of domestic and foreign institutional investors. FIIs pumped in more than Rs. 1 lakh crore into equities last year, making it the best infusion in the past six years. Any measure to ease the LTCG burden can go a long way in driving the growth of the domestic equity market,” he added.