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LTCG – Long Term Capital Gain Tax

Last Update Date : October 24, 2018

They say patience is the key to paradise. Equity is the best possible way to exponentially grow your funds, only if you invest for a longer duration. Recently, Long-Term Capital Gains have gone through a lot of discussions, all thanks to the Union Budget 2018. On 1st February 2018 after 14 years, re-introduction of the LTCG Tax did cause a stir in the life of the investors.

In this guide, we will take a look at the new LTCG Tax Structure.

ltcg

What are Capital Assets?

A capital asset is defined to include

  • Any kind of property held by a tax payer, whether or not connected with business or profession of him/her.
  • Any securities held by an FII which has invested in such securities by the regulations made under the SEBI Act, 1992.

However, the following items are excluded from the definition of “capital asset”

  • any stock-in-trade (other than securities referred to in (b) above), consumable stores or raw materials held for his business or profession;
  • personal effects, that is, movable property (including wearing apparel and furniture) held for personal use by the taxpayer or any member of his family dependent on him, but excludes
  1. jewellery;
  2. drawings;
  3. archaeological collections;
  4. sculptures;
  5. paintings; or
  6. any work of art.

Capital Gains

Earnings received after the sale of any capital asset as mentioned above is termed as capital gain and will be taxable under the head “Income from Capital Gains”.
Capital Gains are classified into two types

Short Term Capital Gains

Gain received after investment in any capital asset for 3 years, or less is classified as Short-Term Capital Gain. The tax applicable on short-term gains is fixed by the government and comes under section 111A of the Income Tax Act. The current rate stands at 15% excluding cess and surcharge. Short-term capital gains which do not fall under section 111A fall under Normal short-term capital gains and are charged taxes based on the total taxable income of a particular individual.

Long-Term Capital Gains

Gain received after investment in any capital assets for 3 years, or more is classified as Long-Term Capital Gain. Before the introduction of Union Budget 2018, LTCG on listed shares was exempted from tax if the gain was covered under section 10(38). For the tax on LTCG which is not covered under 112 – the rate of tax is at 20% with indexation. For tax on LTCG which is covered under 112 from 1st February 2018, 10% tax was made liable on LTCG exceeding Rs 1,00,000 for one financial year.

Note: From F.Y 2017-18, the investment period for unlisted shares of a company and in case of immovable property being land, building and house property is changed to 2 years from 3 years.

Computation of Long-Term Capital Gains

The Long-Term Capital Gains is computed without considering the indexation cost of the assets.

Example:

Mr Atharv bought 100 shares of Tata Motors Ltd. at Rs 300. The fair market value of each share after 4 years is Rs 325.
Suppose Atharv sells his shares at Rs 350 after 4 years, then his LTCG would be computed as follows:
Cost of Acquisition (Buying Price) = Rs 300
Cost of Sale (Selling Price) = Rs 350
Fair Market Value = Rs 325

Gains/Profit = Cost of Sale – Cost of Acquisition
Therefore, the profit will be (350-300) Rs 50 per share

Total gain = gain/share x no of shares
Therefore the total gain of 100 shares will be (50 x 100) Rs 5,000

Union Budget 2018 and LTCG Tax

  • For LTCG under section 112A, assets are to be held for a minimum period of 12 months from the date of acquisition.
  • The holding period will be counted from the date of acquisition
  • Cost of acquisition (COA) is the price at which an equity share is purchased. In simple terms, it is the Cost Price or Purchase Price of an equity share.
  • Fair Market Value (FMV) is the highest price on a particular date after the cost of acquisition.
  • Cost of Sale (COS) is the price at which an equity share is sold. In simple terms, it is the Selling Price of an equity share.
  • In the case of the unlisted unit, the net asset value of such unit on 31st January 2018 will be the fair market value.
  • The LTCG will be calculated without giving the effect of indexation.
  • The proposed new tax rules will be liable from a transfer made on or after 1st April 2018
  • The sale of equity shares between 1st February 2018 and 31st March 2018 will be eligible for exemption under section 10(38).

Let us look at the four situations while calculating the tax as per new rules

Situation 1:

Cost of Acquisition (COA) on 13th April 2015 Rs 300
Fair Market Value (FMV) as on 31st January 2018 Rs 325
Cost of Sale (COS) on 1st April 2018 Rs 350

Therefore, If COA < FMV and FMV < COS
COA = FMV = Rs 325
Capital Gain = Cost of Sale – Cost of Acquisition = COS – FMV, i.e. Rs 350 – Rs 325 and therefore the result will be Rs 25

Situation 2:

Cost of Acquisition (COA) on 13th April 2015 Rs 300
Fair Market Value (FMV) as on 31st January 2018 Rs 325
Cost of Sale (COS) on 1st April 2018 Rs 320

Therefore, If COA < FMV, COS < FMV and COA < COS
COA = COS = Rs 320
Capital Gain = Cost of Sale – Cost of Acquisition = COS – COS, i.e. Rs 320 – Rs 320 and therefore, the result will be Rs 0

Situation 3: 

Cost of Acquisition (COA) on 13th April 2015 Rs 300
Fair Market Value (FMV) as on 31st January 2018 Rs 250
Cost of Sale (COS) on 1st April 2018 Rs 325

Therefore, If FMV < COA and COA < COS
COA = COA = Rs 300
Capital Gain = Cost of Sale – Cost of Acquisition = COS – COS, i.e. Rs 325 – Rs 300 and therefore the result is Rs 25

Situation 4:

Cost of Acquisition (COA) on 13th April 2015 Rs 300
Fair Market Value (FMV) as on 31st January 2018 Rs 325
Cost of Sale (COS) on 1st April 2018 Rs 275

Therefore, If COA < FMV, COS < FMV and COS < COA
COA = COA = Rs 300
Capital Gain = Cost of Sale – Cost of Acquisition = COS – COA, i.e Rs 275 – Rs 300 and therefore, the result will be Rs -25

If you buy 2000 shares of that company, then according to the above situations, the following will be your long-term capital gains

Situation Capital Gain / Loss (Rs) No. of shares Total Gain (Rs)
1 25 2000 50,000
2 0 2000 0
3 25 2000 50,000
4 -25 2000 -50,000

As we can see, all the gains are under the exemption limit of Rs 1,00,000.

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. This is called as the Grandfathering Clause. According to this 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 Rs 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 XYZ Company, the total capital gain that you receive is Rs 2,00,000, then, Rs 1,00,000 will be exempted under the Union Budget 2018 and the remaining Rs 1,00,000 will be taxable.
Therefore, total tax payable on the LTCG will be 10% of 1,00,000 = Rs 10,000.
For an LTCG of Rs 2,00,000, you will have to pay Rs 10,000 as the LTCG Tax.

Impact of LTCG Tax

  • Before the announcement of Budget 2018, the stock indices were on record high roll.
  • After the introduction of LTCG Tax of 10% on gains above Rs 1,00,000, the direct impact was seen on the stock market as it was high time for the market correction.
  • There was a CAGR of 15% before re-introduction of LTCG Tax, and after the same, it has come slightly down to 13.5% which is still desirable for LTCG Investment.
  • There was an increase in the IPO activity, as many companies rushed in to complete the process till March-2018 to avoid the new LTCG Tax.

LTCG Tax Saving Options

  • Long Term investment in the stock market can be made with the help of an adult child or children.
  • Therefore, if a couple invests in the name of their son or daughter, and their child has turned 18 years, then his or her income cannot be clubbed with the parents. This LTCG will have Rs 1,00,000 exemption and also another Rs 1,50,000 exemption under section 80(C) until and unless he or she starts earning by themselves.
  • Another way by which they can escape the LTCG Tax is by buying and selling of same shares within one year of time.
    Example, If Mr C buys 10000 shares at Rs 50 per share and sells the share after 1 year at Rs 60. So, his total gain would be Rs 1,00,000. Again, he buys the same share at Rs 60 and sells it at Rs 65 after one year, his total gain would remain Rs 50,000 under the exempted limit.
    Whereas, if he keeps the shares for two years, his gain will become Rs 1,50,000. Therefore 10% of excess 50,000 will be taxable under LTCG Tax.
  • Investment in Unit Linked Insurance Plan (ULIP)
    ULIP is an investment option in which the premium that the insured pays is invested in equity or debt, and the insured gets the returns on the investment made. Also, this ULIP is exempted under section 80(C).
    This will be preferred than Mutual Funds.
Factors ULIPs Mutual Funds
Premium Allocation Charges 2-5% per annum NIL
Mortality Charges 1-12 per thousand sum insured NIL
Policy Administration Charges Rs 700-Rs 1,000 per annum NIL
Lock-in Period Minimum 5 years Exit anytime
Flexibility Cannot be transferred to another Fund House Multiple options to shift
Discontinuation Charges 2 to 6 % before 5 years 1 % within 365 days
Taxability Tax Free STCG 15% and LTCG 10%

LTCG tax is re-introduced in Budget 2018 which states that there will be 10% tax levied on LTCG more than Rs 1,00,000 for one financial year. LTCG tax slightly reduces the CAGR from 15% to 13.5% which still makes it an investment which gives higher returns. This move will prove to be beneficial in the long run as it will stabilise the Indian stock markets. Also, it will add to the revenues of the government thereby reducing the fiscal deficit.

H&R Block India is a world leader in filing taxes with a dedicated team of highly qualified tax experts. These tax experts help you file your taxes in a smooth and hassle-free manner.

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