Union Budget May Not See A Cut In Long Term Capital Gains Tax

It's always difficult to speculate on what the budget may or may not have. Many reports suggest that the Long Term Capital Gains Tax that is levied on equity shares and equity mutual funds would go.

It's unlikely that this could happen in the Union Budget to be delivered on Feb 1, 2020. To begin with, the Sensex is at a record high of 42,000 points and each trading day seems to be bringing with it another day of record highs.

If the markets are in a depressed state, it makes sense to cut Long Term Capital Gains tax to help sentiments. At the moment, that is not the case.

Secondly, across the globe there is a tax that is levied on capital gains. Apart from this, you have capital gains tax that is already levied on asset classes like debt, gold, and real estate over the long-term. One would not like to grant an exemption only to equity and equity mutual funds, given that there has already been an increased level of participation from investors, especially in mutual fund investment.

One of the most important reasons why there may not be a cut in the LTCG is the fact that the fiscal deficit of the government is really precarious. The government is likely to breach this years target of 3.4 per cent and could end-up with a fiscal deficit of nearly 3.8 per cent of GDP. With economic growth momentum considerably slowing down, the government may have to tighten things. In this context it may not be at liberty to do away with the long-term capital gains on equity shares and equity mutual funds, especially since the returns from the later have been very good over the last 2 to 5 years.

If the government decides to cut income tax rates, it's unlikely to cut LTCG as well.