If you have ever seen TV shows such as Fear Factor, you may have wondered why people do such outrageous things. The motivation and reasoning behind such attempts are due to the thrill of the adventure and the financial gains. All adventure seekers or adrenaline junkies can understand the thrill of succeeding after taking a risk. The combination of money and adventurous risks doubles the high we feel upon succeeding. When we invest in equity shares we tread lightly in shallow waters but we can still experience the same thrill if the risks taken in our investments pay off financially. An added benefit of investing in equities is the tax exemption we can avail of; however, the 2018 Budget has proposed the removal of the exemption u/s10(38) and the introduction of a brand new section – 112A, which will come into effect from April 1st, 2019.
As per this new section long term capital gains, more than Rs 1,00,000 from either equity shares, business trust unit or unit of equity oriented fund will be taxed at 10%. If the Securities Transaction Tax (STT) has been paid both at the time of purchase and sale of these assets then it shall be taxed at 10%. If such long term capital assets acquired before February 1st, 2018, then the cost of acquisitions of such long term capital asset will be higher of either of the following:
The FMV will be determined by the highest price as per the listing on the stock exchange as of January 31st, 2018 or the earliest prior date, if they were not traded on January 31st, 2018. Additionally, for units not listed on the stock exchange, the FMV will be determined as per the net asset value as of January 31st, 2018. Finally, the benefits under Chapter VIA and section 87A will not be allowed for such capital gains.
So, prior to 31st January 2018, if an equity share is purchased at Rs 100 and as of 31st January 2018 the highest price quoted is Rs 120, then on the gain of Rs 20, will attract no tax, if from the date of purchase, the share is held for one year. But, for gains over Rs 20 after 31st January 2018, it will be taxed at 10% if it is sold after 31st July 2018. So, if the same share is sold after 1st August 2018 for Rs 150, then only Rs 30 will get taxed at 10%. For any gains on shares held up to a period of one year, it will attract short term capital gains and be taxed at 15%.
Additionally, proposal of an introduction of a tax rate of 10% on income distributed by equity oriented mutual fund has been put forth. The intention is to level the playing field across dividend distributing and growth oriented funds.
To explore how the Budget 2018 affects your capital gains, talk to our tax experts at H&R Block India.