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FAQs On The New 'Long Term Capital Gains Tax' On Equity

If you are an investor in the Indian stock markets — whether directly through equity shares, or indirectly through equity mutual funds / ULIPs — you would have surely heard the bad news.

The Govt., in its recent Union Budget 2018-19 announced on Feb 1, 2018, decided to do away with the tax-free status enjoyed by equity investments, when the holding period exceeds one year. Gains for less than a year of investment (classified as short term capital gains) are taxed at 15%; and the same will continue.

Henceforth, long term capital gains above Rs.1 lakh, will be liable for 10% tax (without any indexation benefit). However, in this regards, one relief measure has been provided. Gains accrued up to Jan 31, 2018, will not be taxed.

Pursuant to the above budget announcement, the Central Board of Direct Taxes has issued the Frequently Asked Questions regarding taxation of long-term capital gains proposed in Finance Bill, 2018.

Here's a key summary of the same.

One. The aforesaid tax of 10% shall apply on the gains arising out of 
- equity shares in a company listed on a recognised stock exchange
- units of an equity oriented mutual fund, and
- unit of a business trust

Two. The holding period should be a minimum of 12 months.

Three. Securities Transaction Tax (STT) should have been paid at the time of sale (and also at the time of purchase for certain specified transactions).

Four. This new long term capital gains tax will be applicable with effect from April 1, 2018.

Five. Formula for capital gain will be = Sales consideration - Cost of Acquisition

Six. Cost of Acquistion will be (a) the Actual Cost of Acquisition or (b) Fair Market Value as on Jan 31, 2018, whichever is higher. Hence, the gains that you have made till Jan 31, 2018 will NOT be taxed.
For example
- You purchased a share or a mutual fund on Aug 1, 2017 for Rs.100
- The highest share price or NAV on Jan 31, 2018 was Rs.200
- You sold the above share or mutual fund after Jul 31, 2018 at Rs.250

So, you will have to pay tax @10% on the notional gain of Rs.50 (= Sale Price of Rs.250 - the Highest Price on Jan 31, 2018 i.e. Rs.200) and not on the actual gain of Rs.150 (= Sale Price of Rs.250 - Purchase Price of Rs.100).

Note: If the Sales consideration is LESS than the Fair Market Value, then Sales consideration or Actual Cost, whichever is higher, will be taken as cost of acquisition
Case 1. You sold the above share or mutual fund after Jul 31, 2018 at only Rs.150.
Well, your Sale Price will be considered as the cost of acquisition, instead of the actual cost of purchase of Rs.100. So you will have a no-loss no-gain situation.

By the way, you can't say that you made a notional loss of Rs.50 (= Sale Price of Rs.150 - the Highest Price on Jan 31, 2018 i.e. Rs.200).

Case 2. You sold the above share or mutual fund after Jul 31, 2018 at only Rs.50?
Well, you will have a long term capital loss of Rs.50 (= Sale Price of Rs.50 - Purchase Price of Rs.100).

By the way, you can't say that you made a notional loss of Rs.150 (= Sale Price of Rs.50 - the Highest Price on Jan 31, 2018 i.e. Rs.200).

capital-gains-tax-on-equity
Your queries on Long Term Capital Gains Tax answered.

Seven. What if your stock was in a loss as on Jan 31, 2018.
- You purchased a share or a mutual fund on Aug 1, 2017 for Rs.100
- The highest share price or NAV on Jan 31, 2018 was Rs.50
- You sold the above share or mutual fund after Jul 31, 2018 at Rs.150

So, you will have to pay tax @10% on the actual gain of Rs.50 (= Sale Price of Rs.150 - Purchase Price of Rs.100) and not on the notional gain of Rs.100 (= Sale Price of Rs.150 - the Highest Price on Jan 31, 2018 i.e. Rs.50).

Eight. Fair Market Value of an equity share will be the HIGHEST PRICE quoted on a recognized stock exchange on Jan 31, 2018 (or the immediately preceding trading date, if the stock was not traded on Jan 31, 2018).

For unlisted units, the Net Asset Value (NAV) of the scheme as on Jan 31, 2018 will be the Fair Market Value.

Nine. As mentioned earlier, this new tax is NOT ELIGIBLE for the benefit of inflation indexation of the cost of acquisition.

Ten. Since the taxation becomes effective from April 1, 2018 onward, Long Term Capital Gains earned during the period Feb 1 to Mar 31, 2018 will be
- EXEMPT from tax if the shares / mutual funds are sold BEFORE April 1, 2018
- TAXABLE if the shares / mutual funds are sold AFTER Mar 31, 2018

Eleven. For resident Indian, TDS (Tax Deduction at Source) will NOT be deducted on this new tax. However, 10% TDS will apply to non-resident investors.

Twelve. Long-term capital losses incurred on or after 1st April, 2018 will be allowed to be set-off against any other long-term capital gains. Unabsorbed losses can be carried forward to subsequent eight years, for set-off against long-term capital gains in those years.

Thirteen. Losses during the period Feb 1 to Mar 31, 2018 will not be considered for either set-off or carrying forward. 

Fourteen. As regards bonus and rights shares acquired before Jan 31, 2018, the same methodology and logic to arrive at the cost of acquisition will apply, whereby the gains till Jan 31, 2018 are not taxed.

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