Taxation on the Long term Capital Gain from 1st April 2018


(Last Updated On: May 12, 2018)

Introduction:

You must be aware that from F.Y 18-19, Long Term Capital Gains on equities and equity fund shall be taxed under the newly inserted Section 112A under the I-T Act,1961. By the way of Budget 2018, LTCG on equities has also been brought into tax net. This move has been brought up keeping in mind the fact that a vibrant equity market is essential for the economic growth of a country. Let’s get a deep insight of it and know how it will impact you.

Background:

In 2004, the Capital Gains Tax was abolished and was replaced by the Securities Transaction Tax. Then exemption u/s 10(38) was provided on the equities which were STT paid. However, with the insertion of the new provision u/s 112A, from 1st April 2018, both STT and Capital Gains Tax would levy on the gain in excess of Rs 1,00,000.

Provision before Budget 2018:

Earlier i.e. until F.Y 17-18, the tax on equities was exempt u/s 10(38), if such units or shares were held for at least one year and were subject to STT. Now with the insertion of the provision under Section 112A, the exemption u/s 10(38) stands withdrawn.

Newly Inserted Provision:

As per Sec 112A, “If the LTCG arising on the sale of equity oriented Mutual Funds and equity shares exceeds Rs 1 lakh in a year, then it will be taxed at the rate of 10% without any benefit of indexation. Therefore, if the amount of LTCG is less than Rs 1 lakh in a financial year, then this provision is not for you.

Grandfather Clause :

Excitingly, the exemption on LTCG tax was continued until 31 January 2018 by inserting a grandfather clause in sec 112A. In simple words, if the purchase of equity is done before 31/1/2018 but Sold on or after 1/4/2018 then only the gains that would arise after 31 January 2018 would be considered for the purpose of tax calculation. In such case, the method of determining the Cost of Acquisition (“COA”) of such investments is as under :

The COA of such investments shall be deemed to be the higher of-

  1.    The Actual COA and
  2.     The lower of-
    • Fair Market Value (‘FMV’) as on 31-01-2018
    • the Full Value of Consideration  i.e. the Sale Price

Now let’s understand how this provision will impact you with the help of an example:

Particulars

Earlier

Now

Date of Purchase

18-Jan- 16

18-Jan-2016

Date of Sale

5-Apr-18

5-Apr-18

Purchase Price

400000

400000

Sale Price

740000

740000

FMV on 31 January 2018

620000

620000

Computation of taxes on LTCG

  

Sale consideration

740000

740000

Less: the cost of acquisition considered

400000

620000

Capital Gains/(Loss)

340000

120000

Exemption u/s 10(38)

340000

Net Capital Gain

120000

Tax at 10%

2000

[Tax levied at 10% on Rs. 20,000 i.e. LTCG exceeding Rs.1 lakh]

In the above example, if the tax would have been below Rs, 1,00,000, then the whole gain amount would have been exempt.

Summary :

The various scenarios which will help you to understand the amendment in a better way have been summarized as below :

Long Term Capital Gain on equities


Conclusion :

With the amendment in LTCG taxation, volatility in the market cannot be ruled out as most of the investors would favor selling their equities whenever they will get a chance to earn returns in the short term, rather than holding those equities for more than a year and ending up paying 10% LTCG. so that his funds get free frequently and he could re-enter the market.

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Author


Team Tax2Win