Retail investors can watch out for these changes in equity, taxation of debt in the budget

NEW DELHI: The majority of a dozen brokerages surveyed by believe a major tax tightening on the equity side is unlikely in the next budget, although small changes cannot be ruled out in the case mutual funds.

The raising of the Long Term Capital Gains (LTCG) exemption limit from Rs 1 lakh at present, switching the game between the tax treatment of direct investments in listed debt securities and indirect investments by through debt-focused mutual fund regimes; and raising the TDS threshold limit for mutual fund dividends are a few expectations analysts are keeping in the budget. Any hostile market action is unlikely, according to the survey.

Currently, long-term capital gains (LTCG) from the sale of publicly traded stocks and units of equity-oriented mutual funds are taxed at the rate of 10%, if the LTCG exceeds Rs 1 lakh during a financial year. .

Analysts see no change in capital gains tax on shares, as taxation of shares was introduced recently and the government would like to maintain continuity.

“However, the capital gains tax exemption limit on shares may be raised from the current Rs 1 lakh to provide some relief to retail investors,” said Pankaj Pandey of ‘ICICIdirect.

Currently, profits recognized on the sale of direct investments in securities such as bonds, debentures, government securities listed on a recognized stock exchange are deemed to be long term after one year and capital gains term are taxed at 10%.

But gains realized on debt fund shares must be held for three years to be treated as long-term capital gains. They are taxed at 20 percent with indexation benefits.

“We expect it to become uniform and identical for debt securities and mutual funds,” said Vinit Bolinjkar, head of research at Ventura Securities.

Further, Bolinjkar said interest income from fixed bank deposits above Rs 40,000 attracts TDS. However, in the case of dividends received from mutual funds, the limit is Rs 5,000.

“We expect an increase in the TDS threshold limit for mutual fund dividends,” he said.

Industry body AMFI in its budget wishlist said the threshold limit of Rs 5,000 for TDS on the distribution of income (dividends) on mutual fund shares is too meager and very low by compared to the threshold of Rs 40,000 applicable to interest on FD bank. He noted that the increase in the threshold limit would alleviate the difficulties faced by small retail investors, who would otherwise have to apply for the refund of TDS in the next tax year.

Vinod Nair, head of research at Geojit Financial Services, said the disparity between the treatment of long-term capital gains for direct investments in debt funds and investments via mutual funds can be corrected. . “The minimum holding period for debt mutual funds should be classified at 12 months instead of 36 months, in line with direct debt investments,” he said.

ICICIdirect’s Pandey, meanwhile, expects a tax exemption of around Rs 10,000 – similar to interest on a savings bank account – could be granted for dividend income, as it is currently taxed at a marginal tax rate with no exemptions.

Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares & Stock Brokers said that since promoting growth with fiscal consolidation is the theme of the budget, any tax cuts in financial markets seem unlikely.

“At the same time, given the fragile nature of the economic recovery so far and the likely continuation of the objective of significant market borrowing and divestment, any negative surprises for financial markets seem equally unlikely, so the path of least resistance appears to be maintaining existing tax standards,” he said.

In the meantime, there has been a request for harmonization of surtaxes on dividend income. The Finance Act 2020 capped the surtax rate on “dividend income” on shares at 15% in the hands of unincorporated taxpayers. However, there is no similar cap on surtax rates with respect to the distribution of income from mutual fund equity plans. Therefore, MF investors are required to pay a higher surcharge at rates ranging from 25% to 37%. That said, none of the brokerages interviewed suggested a change in this regard.

There are calls for the abolition of the securities transaction tax (STT). But that seems unlikely this time, analysts said.