Effective from 1 April 2018, long-term capital gains (LTCG) from equity instruments—be it listed shares or equity-oriented mutual funds—will attract tax. The new provision of tax on LTCG from equity was introduced in the Finance Act, 2018. While earlier such gains on equity were exempt from tax, now you will have to pay 10% tax on gains exceeding Rs1 lakh a year. We answer three questions on LTCG and tax on the gains.
Q1: When does an equity holding become long term?
There is no change in the period of holding after which equity investments are considered long term. If you hold equity investments for more than a year, they will be considered long-term; holding period of less than a year is considered short term.
Q2: How to calculate LTCG tax?
Short-term capital gains (STCG) on listed equity mutual funds or shares where security transaction tax (STT) is paid, continue to be taxed at the rate of 15% plus cess. But according to the new rules, LTCG will be taxed at 10%. However, there are two things to consider while calculating tax liability—one is Rs1 lakh exemption a year, and another is the grandfathering provision.
If you had invested equity mutual funds or shares before 31 January 2018, any gains till that date will be considered as grandfathered and thus will be exempt from tax.
If you are selling the shares after holding them for more than a year, to factor in the grandfathering provision, you need to calculate capital gains based on the cost of acquisition (COA). This cost would be higher of the purchase price or the fair market value (FMV) as on 31 January. FMV means the highest price of such share or unit quoted on a recognized stock exchange on 31 January 2018. If there is no trading on 31 January, the FMV will be the highest price on a date immediately preceding 31 January, on which it has been traded.
Say, you invested Rs5 lakh in shares on 1 April 2015 at a rate of Rs100 each. On 31 January 2018, one share’s value was Rs175, and you sold it for Rs200 on 2 April 2018. In this case, the COA would be Rs175 [higher of purchase price (Rs100) and price as on 31 January (Rs175)]. Your taxable capital gains would be selling price minus COA multiplied by number of shares—(200-175)*5,000=1,25,000.
After Rs1 lakh tax exemption, net taxable LTCG would be Rs25,000 (Rs1.25 lakh minus Rs1 lakh). Your tax liability would be Rs2,500 (10% of Rs25,000) plus cess.
However, if the share price was Rs90 on 31 January 2018, then the cost of acquisition would be Rs100 [higher of purchase price (Rs100) and price as on 31 January 2018 (Rs90)]. In this case, assuming that you sold the shares at the same rate, the taxable capital gains would be (200-100)*5,000= 5,00,000.
After Rs1 lakh exemption, the net taxable gains would be Rs4 lakh. Tax liability on this would be Rs40,000 (10% of Rs4 lakh) plus cess.
So, before you plan to liquidate your equity investments, calculate the tax liability to make an informed decision.
Q3: What about long-term capital losses?
Long-term capital losses are allowed to be set off and carried forward in accordance with the earlier provisions of the Income-tax Act, 1961.
If you have such a loss, you can set off against any other LTCG. And if there is any unabsorbed loss, it can be carried forward to subsequent 8 years for set-off against long-term capital gains.