Long-term capital gain tax in, markets steady but what does 'grandfathered' mean?

Mumbai: Though the benchmark BSE Sensex regained the 36,000-mark by rebounding over 171 points in opening trade ahead of the Union budget, markets fell somewhat after the document was read by Finance Minister Arun Jaitley on Thursday.

The much-expected tax on long term capital gain was introduced by the Finance Minister. Gain on direct equity above Rs 1 lakh will be taxed at 10 per cent after one year. So far, there was no tax if stocks were sold after a year.

Jaitley, however, announced that capital gains made till Janaury 31 would be 'grandfathered'. The term ‘grandfathered’ comes from the economic principle known as ‘grandfathering’, which means old situations are exempt from a new law or regulation. Those investments which are exempted are said to have been grandfathered in, or gained grandfather rights.

Also read: Union Budget 2018: Key highlights

A 10 per cent tax on distributed income by equity-oriented mutual funds has also been proposed in the Budget.

Jaitley said: "The return on investment in equity is already quite attractive even without tax exemption. There is therefore a strong case for bringing long-term capital gains from listed equities in the tax net."

He observed a vibrant equity market is essential for economic growth, Jaitley said, "I propose only a modest change in the present regime. I propose to tax such long-term capital gains exceeding Rs 1 lakh at the rate of 10 per cent without allowing the benefit of any indexation."

Markets fell nearly 400 points while the Budget was being read out but recovered soon after.

Before the Budget, the 30-share BSE index, which had lost 318.23 points in the previous two sessions, recovered 171.38 points, or 0.47 per cent, to 36,136.40.

Similarly, the NSE Nifty moved up 49.70 points, or 0.45 per cent, to 11,077.40.

Fresh positions created by retail and domestic institutional investors on hopes of an investor-friendly and growth-oriented budget lifted sentiment, brokers said.

Besides, positive leads from other Asian markets, tracking overnight gains on the Wall Street following the Federal Reserve's decision to keep rates unchanged, influenced sentiments, they said.

Capital goods, consumer durables and infrastructure stocks were lapped up, accounting for much of the gains.

On the macro front, growth of the eight core sectors slowed to a five-month low of 4 per cent in December 2017 due to negative performance of segments like coal and crude oil, official data showed on Wednesday.

In Asian trade, Hong Kong's Hang Seng was up 0.24 per cent while Japan's Nikkei edged higher by 1.28 per cent in early trade on Thursday. Shanghai Composite Index, however, shed 0.97 per cent.

The US Dow Jones Industrial Average closed 0.28 per cent higher on Wednesday.