Long Term Capital Gains Tax - Equity - Explained 2018

 

Long Term Capital Gains Tax - Equity - Explained 2018

 

Budget India 2018 reported by the Finance minister Mr. Arun jaitley last week (1st Feb, 2018) that everyone was expected on Income Tax slab changes and related on Tax saving things. But, nothing has done on these expectations.

The Budget proposed to tax for the equity on Long term Capital Gains (LTCG), and this unseen destined the investors in the market on same day. They started the Long term Capital Gains for equity taxed at 10 % without indexation, if the capital gains exceeding more than 1 lakh rupee. This is applicable too for equity oriented mutual funds.

This proposed tax is not a new thing, but before the Former Finance minister Mr. Chidambaram revamping it in the budget 2004-05, proposed to abolish the tax on long term capital gains for equity and recommend to levy a small tax called, 'Securities Transaction Tax (STT) ". Now, Mr. Arun Jaitley brought back this with tax at 10 %, but not removing the Securities Transaction Tax.

For the Long term Investors and SIP mutual fund investors had a lot of worry, as they entered to the market due to this Tax free benefits. The new tax of 10 % for LTCG equity may be a hard one, but it will not affect more for the retail investors as compared to the Larger bulky holders.

It still produce the better returns even after taxation, as compared to other financial products and beat inflation also. As for the long term investors, we had a time to wait and stick with our financial goals.

How the Long term capital gains - Equity - taxed ?

 

Budget India 2018 tells that the Long term Capital Gains for the  Equity and Equity oriented mutual funds will be taxed at 10 % without indexation.

Equity or Equity oriented funds are considered for a Short term or Sold within one year from the purchasing date, is a Short term capital gains (STCG) and the tax for STCG at 15 %. For a long term or sold after one year from the purchasing date, is a Long term capital gains. Previously, Long term capital gains are tax free and now it was proposed to tax at 10 %

 

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• If you bought a stock or unit of a fund before 31st Jan, 2018 and sold after one year, you will be considered for Grandfathered tax free exemption and also Capital gains exemption upto 1 lakh rupee (as per Budget 2018) on your profit. Beyond this, you have to pay tax at 10 %


• If you bought after 31st Jan, 2018 and sold after one year, you will not get this Grandfathered tax free exemption and pay LTCG tax if your profit exceeding Rs. 1 lakh.

(Updated on changes - 05/02/18 by Ministry of Finance report:  " Long term Capital Gains for Equity or Equity oriented funds will effect from April 1, 2018 " said by finance ministry on 05.02.2018. The LTCG tax is for transactions with effect from April 1, 2018. If you sell after 31.03.2018, the LTCG will be taxed as follows,

1. The cost of acquisition of the share or unit bought before Feb 1, 2018, will be the higher of :
a) the actual cost of acquisition of the asset
b) The lower of : (i) The fair market value of this asset(highest price of share on stock exchange on 31.1.2018 or when share was last traded. NAV of unit in case of a mutual fund unit) and (ii) The sale value received/accrued when the share/unit is sold.

The transactions between February 1 and March 31, 2018 will be eligible for exemption under Income Tax act - Section 10(38). The Long term capital loss cannot be set off between these period (Feb 1 - Mar 31).

Source: Economic Times on LTCG Tax - Equity  )

Lets see with some illustrations,



 

Illustration 1:

If you bought 10,000 shares at the price of Rs. 10 /share (or) 10,000 units of a fund with a NAV - 10 on June 10, 2017.

On January 31, 2018 the price per share or unit is Rs. 20 /-. If you sell these shares before one year from the buying date, then you will be taxed at 15 % on Short term capital gains tax (STCG).

If you sell after one year from the buying date, (Rs. 35 per share on Sell),

Your total Investment -  Rs. 1,00,000 /- ( 10,000 X 10)

Profit - 3,50,000 – 1,00,000 = Rs. 2,50,000 /-

you will be offered for Grandfathered Tax free deduction as on January 31, 2018 and no tax for the profits up to Jan 31, 2018.

(3,50,000 – 2,00,000 = 1,50,000 /- )

Capital Gains exemption up to 1 lakh - (1,50,000 – 1,00,000 = 50,000 /-)

Hence, you have to pay tax at 10 % for the Rs. 50,000 /- (i.e Rs. 5000 /- tax)

 

Illustration 2:

If you bought 10,000 shares at the price of Rs. 10 /share (or) 10,000 units of a fund with a NAV - 10 on September 25, 2017.

On January 31, 2018 the price per share or unit is Rs. 25 /-. If you sell these shares before one year from the buying date, then you will be taxed at 15 % on Short term capital gains tax (STCG).

If you sell after one year from the buying date, (Rs. 22 per share on Sell),

Your total Investment -  Rs. 1,00,000 /- ( 10,000 X 10)

Profit - ( 2,20,000 – 1,00,000 ) = Rs. 1,20,000 /-

you will be offered for Grandfathered Tax free deduction as on January 31, 2018 and no tax for the profits up to Jan 31, 2018.

( 2,50,000 – 1,00,000 = 1,50,000)

You can note that the price on January 31, 2018 is Rs. 25/- and the sold price at Rs. 22 /- Hence, the sold price is less than the price on January 31, 2018 - ( 25 – 22 = 3).

No Tax to pay for the profits booked.

IF Grandfathered Capital Gains > Actual Capital Gains on Sell, then LTCG Tax will be Zero. So, No need to pay tax.

 

 

Illustration 3:

If you bought 10,000 shares at the price of Rs. 100 / share (or) 10,000 units of a fund with a NAV - 100 on September 25, 2017.

On January 31, 2018 the price per share or unit is Rs. 80 /-. If you sell these shares before one year from the buying date, then you will be taxed at 15 % on Short term capital gains tax (STCG). If any net loss or negative on selling, you can offset that loss in Income tax returns.

If you sell after one year from the buying date, (Rs. 110 per share on Sell),

Your total Investment -  Rs. 10,00,000 /- ( 10,000 X 100)

Actual Capital Gains - ( 11,00,000 – 10,00,000 ) = Rs. 1,00,000 /-

Grandfathered tax free deduction applied as on January 31, 2018.

( 8,00,000 – 10,00,000 )= [ – 2,00,000 ]  2 Lakh net loss or Negative

Capital Gains Tax = (10,00,000 - Net loss or negative or Zero) = Rs. 10,00,000 /-

You can also note that you have an exemption of up to Rs. 1 lakh on Capital Gains.

No Tax to pay here.

 

Illustration 4:

 

If you bought 10,000 shares at the price of Rs. 100 / share (or) 10,000 units of a fund with a NAV - 100 on April 15, 2018

You are not eligible for Grandfathered tax free as on January 31, 2018. If you sell these shares within one year from the buying date, then the tax at 15 % on Short term capital gains tax (STCG).

If you sell at a profit after one year, you have to pay LTCG tax at 10 % if the capital gains exceeding Rs. 1 lakh.

 

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