New Long Term Capital Gain Tax (LTCG)

Investing in equity markets is one of the best possible way to exponentially grow your funds, only if you invest for a longer duration. The Long-Term Capital Gains have gone through a lot of discussions, thanks to the Union Budget 2018. In India, the LTCG on stocks and equity mutual funds were tax-free for the last 14 years. On 1st February 2018 after 14 years, the Government has introduced a 10% LTCG tax on gains made above INR 1 Lakh.

The move to bring in long term capital gains tax is a major amendment impacting all investors. The manner in which long term capital gains will be taxed is unique since the accretion in the value of the shares/ equity oriented mutual funds as on 31 January 2018 will be available as the cost of acquisition thus giving some investors a cost step-up. In other words, only the gains accruing from February 1, 2018 will be subject to the Long term tax. The concept of Grandfathering was introduced by Budget 2018.

Let us take a look at the new LTCG Tax Structure:

The concept of grandfathering in the case of LTCG on sale of equity investments works as follows:

A method of determining the Cost of Acquisition (“COA”) of such investments has been specifically laid down according to which the COA of such investments shall be deemed to be the higher of-

1. The actual COA of such investments; and
2. The lower of-
   • Fair Market Value (‘FMV’) of such investments; and
   • the Full Value of Consideration received or accruing as a result of the transfer of the capital asset i.e. the Sale Price

Points to be considered:

1. If you sell after 31-3-2018, the LTCG will be taxed as per above formula.
2. Indexation of the cost of acquisition (determined as per above formula) will not be allowed.
3. Setting off cost of transfer or improvement of the share/unit will also not be allowed.
4. This LTCG will be taxed at 10% for all listed equity shares where STT is paid on purchase and sale and at 10% for units of equity oriented MFs where STT is paid on the sale of these units . As STT is paid/deducted if you sell your equity MF units back to the MF or on the stock exchange the new LTCG regime would apply to these. This means that the LTCG tax regime would be unchanged for unlisted equity shares where STT is not paid on purchase or sale.

Here’s how LTCG will be computed in different scenarios as explained by the Income Tax Department FAQs:

Scenario 1 –

If COA < FMV and FMV < SV, then COA = FMV = INR 200. Capital Gain = Sale Value – Cost of Acquisition = SV – FMV, i.e. INR 250 – INR 200 and therefore the result will be INR 50.

Scenario 2 –

If COA < FMV and FMV > SV, then COA = SV = INR 150. Capital Gain = Sale Value – Cost of Acquisition = SV – FMV, i.e. INR 150 – INR 150 and therefore the result will be INR 0.

Scenario 3 –

If FMV < COA and COA < SV, then COA = COA = INR 100. Capital Gain = Sale Value– Cost of Acquisition = SV – COA, i.e. INR 150 – INR 100 and therefore the result is INR 50.

 Scenario 4 –

If COA < FMV, SV < FMV and SV < COA, then COA = COA = INR 100. Capital Gain = Sale Value – Cost of Acquisition = SV – COA, i.e INR 50 – INR 100 and therefore, the result will be INR -50 Capital loss.

These situations are applicable only for the shares purchased before 31st January 2018. Gains on shares sold before 31st March 2018 are exempted as per previous rule. According to this Grandfathering Clause, the previous rules continue to be applied for a certain period of time, and after completion of the period, the new rules would be applied. These four situations are the applications of the grandfathering clause.

After 1st of April 2018, if your capital gains exceed INR 1,00,000, then the 10% of the exceeding amount will be charged as LTCG Tax.

Example: After the sale of your shares of an ABC Company, the total capital gain that you receive is INR 5,00,000, then, INR 1,00,000 will be exempted and the remaining INR 4,00,000 will be taxable.

Therefore, total tax payable on the LTCG will be 10% of INR 4,00,000 = INR 40,000.

For an LTCG of INR 5,00,000, you will have to pay INR 40,000 as the LTCG Tax.

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