2018 · GS Paper 3 · Q2 · 10 marks
Comment on the important changes introduced in respect of the Long-term Capital Gains Tax (LCGT) and Dividend Distribution Tax (DDT) in the Union Budget for 2018-2019.
In short
The Union Budget 2018-19 withdrew the exemption on long-term capital gains from listed equity, taxing gains above Rs 1 lakh at 10% under Section 112A, and levied 10% DDT on equity mutual fund dividends. Gains accrued up to 31 January 2018 were grandfathered.
Model answer
Ghissu Editorial · Verified 4 Oct 2026 · 308 words
Scope of LTCG
Listed shares, equity fund units and business trust units held over a year were taxed under Section 112A without indexation, while short-term gains stayed at 15%.
Grandfathering
Gains accrued up to 31 January 2018 were protected by stepping up the cost to that day's market value, so only future appreciation was taxed.
Neutrality for funds
DDT on equity fund dividends stopped investors from escaping LTCG by choosing the dividend option over the growth option.
Closing the loan route
Deemed dividends under Section 2(22)(e), used by closely held firms to pass profits as loans, now attracted DDT payable by the company.
Merits
The base widened, with about Rs 20,000 crore expected in the first year, and the tilt of savings towards financial assets over manufacturing was reduced.
Concerns
Securities Transaction Tax stayed alongside LTCG, there was no indexation, and markets fell sharply the day after the Budget.
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Taxation & Revenue2 questions
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Question from the official UPSC Civil Services (Main) Examination 2018 paper. Answer written by Ghissu's engine and checked against our editorial standards. Found an error? Tell us and we correct it within 48 hours.