The proposed long-term capital gains (LTCG) tax on equity (including shares and equity mutual funds) in the Union Budget 2018 came as a blow for investors. The Budget says that after 1 April 2018, the LTCG earned from investments in equity will be taxed at 10%. However, any LTCG earned till 31 January 2018 will be grandfathered, which would mean that LTCG earned before 31 January will not be taxed.
This move may prompt some investors to rejig their portfolios. There is some good news for them. On 4 February 2018, the Central Board of Direct Taxes (CBDT) released a list of frequently asked questions (FAQs) about the proposed tax on LTCG (read here: incometaxindia.gov.in/News/FAQ-on-LTCG.pdf). It says that the tax on LTCG would not be applicable on transfers (of equity investments) that are made between 1 February 2018 and 31 March 2018. Read more about the proposed rule and its tax implications.
The new LTCG tax will be applicable to transfers made on or after 1 April 2018. Transfers between 1 February 2018 and 31 March 2018 will be eligible for exemption, as they are now under clause (38) of section 10 of the Income-Tax Act, 1961. So, if you sell these shares or mutual fund units before 31 March 2018, the date 31 January 2018 does not matter to you. Any gains in such cases will be taxed according to the current tax regime.
If you sell or exit an equity investment within 1 year of its purchase, gains will be considered short term capital gains and taxed at 15.45% including cess. If you sell it after a year of holding, any gains from the transfer or sale will be considered LTCG and no tax will be applicable.
So, if the price of a share has risen significantly after 31 January, and you have held it for over a year, it would be more tax efficient to sell it before 31 March and buy it back—if you want to stay invested in it.
However, if you find that the price of your equity investment has gone down after 31 January, but the long-term prospect of the investment is intact and you want to hold on to it, you should not sell the share, as there would be no tax benefit in selling it and buying it back.
The date of 31 January 2018 comes into play only when the investment you hold was purchased before 31 January and you sell it after 1 April 2018.
In this case, to calculate the gains, one has to know the fair market value (FMV) of that equity investment as on 31 January 2018. FMV means the highest price of such share or unit quoted on a recognized stock exchange. If there was no trading in the particular stock on 31 January 2018, FMV will be the highest price quoted on the date immediately preceding 31 January 2018, on which it was traded.
When you sell an equity investment after 1 April 2018, assuming it was bought before 31 January 2018, you need to calculate the capital gains based on its cost of acquisition. Cost of acquisition is higher of the purchase price or the FMV on 31 January 2018 (for these shares or mutual fund units).
Let’s take an example: Say you bought a share for Rs100 on 1 January 2015 and its price on 31 January 2018 was Rs300. In this case the cost of acquisition for calculating capital gain would be Rs300, as this is higher of its purchase price (Rs100) and its price as on 31 January (Rs300). If the shares’ price was Rs50 on 31 January 2018, then the cost of acquisition would be taken as Rs100, again higher of purchase price (Rs100) and price as on 31 January 2018 (Rs50).
The difference between selling price and the cost of acquisition would be the capital gain or loss. If there is gain, it will be taxed at 10.4% including cess. In case of long-term capital loss, it will be allowed to be set-off and carried forward in accordance with existing provisions of the income-tax Act. Thus, it can be set-off against any other LTCG and any un-absorbed loss can be carried forward to subsequent 8 years for set-off against LTCGs.