Understanding the proposed Long Term Capital Gains Tax
“I propose to tax such long-term capital gains exceeding Rs.1 lakh at the rate of 10% without allowing the benefit of any indexation.” - What does this quote by the FinMin in the budget mean for you? The highly expected long-term capital gains tax hit the budget today with a soothing grandfathering provision. Let us understand the current provisions and then the effect of this new proposal before deciding anything on selling your shares or redeeming the mutual funds units.
Taxation for FY2017-18
Current provision of Income Tax Act, 1961 exempts the long-term capital gains on sale of listed shares and equity oriented mutual funds units. That means investors need not to pay any tax on gains from such investments made before a year. If investments in equity or mutual funds are sold within a year, gains will be treated as short term capital gains and taxed at 15%.
Proposed taxation w.e.f 01 April 2018
There is no change in the treatment of short term capital gains, nor any change in a period of holding for determining the nature of gains i.e. short-term or long-term and the same remains at 12 months for the investments where STT is paid.
Calculating taxable Long-Term Capital Gains (LTCG) for investments prior to 01 February 2018 would need some additional exercise and be treated differently for taxation. LTCG exceeding Rs.1Lac made on or after 01 April 2018 would be taxed at 10%. However, gains up to 31 January 2018 will be grandfathered; that means cost for calculating gains shall be deemed to be higher of-
- the actual cost of acquisition of such asset; and
- the lower of-
(a) price quoted on exchange on the 31 January 2018; and
(b) the full value of consideration received or accruing on transfer.
Tricky? Let’s take an example. You have bought equity shares of A Limited on 01.02.2017 for Rs.180 and sale occurs on 01.08.2018 at Rs.260. Here are two scenarios:
| Sr. | Particulars | Scenario 1 | Scenario 2 |
|---|---|---|---|
| (1) | Actual cost of acquisition | Rs.180 | Rs.180 |
| (2) | Price quoted on exchange on the 31.01.2018 | Rs.150 | Rs.200 |
| (3) | Sale Price | Rs.260 | Rs.260 |
| (4) | Lower of (2) and (3) | Rs.150 | Rs.200 |
| (5) | Higher of (1) and (4) | Rs.180 | Rs.200 |
| (6) | Deemed Cost of Acquisition is (5) | Rs.180 | Rs.200 |
| (7) | LTCG (Sale less Deemed Cost of Acquisition) | Rs.80 (Rs.260-Rs.180) | Rs.60 (Rs.260-Rs.200) |
After deriving the amount of LTCG, it comes to paying the taxes. LTCG exceeding Rs.1Lac are taxed at 10%, but what about tax on Rs.1Lac? Let us understand the taxation for an individual below 60 years having following slabs rate.
| Income Slab | Tax Rate |
|---|---|
| Income up to Rs.2,50,000 | No Tax |
| Income from Rs.2,50,000 – Rs.5,00,000 | 5% |
| Income from Rs.5,00,000 – Rs.10,00,000 | 20% |
| Income more than Rs.10,00,000 | 30% |
Tax effects under various scenarios. We have ignored the tax rebates and cess for ease in calculation and understanding.
| Particulars | Scenario 1 | Scenario 2 | Scenario 3 | Scenario 4 |
|---|---|---|---|---|
| LTCG | 400,000 | 280,000 | 300,000 | 75,000 |
| Other Income | 0 | 120,000 | 300,000 | 525,000 |
| Total Income | 400,000 | 400,000 | 600,000 | 600,000 |
| Tax on LTCG | 5,000 | 5,000 | 20,000 | 0 |
| Tax on balance income | 0 | 0 | 2,500 | 17,500 |
| Total Tax | 5,000 | 5,000 | 22,500 | 17,500 |
Please note that the above interpretation is as per my understanding and shared in the best interest of the readers. Provisions explained above are proposed and will become law on approval of bill. You are also requested to get advice from your Chartered Accountant or Tax Advisor before arriving at conclusion.