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How to calculate tax on LTCG from equity shares and equity mutual funds

In Budget 2018, LTCG was made taxable. This rule applies for transactions made on or after April 1, 2018, and will be applicable for FY 2018-19 onwards.

ET Online|
Aug 10, 2019, 10.41 AM IST
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To calculate LTCG on equity shares and equity mutual funds, an individual is required to calculate cost of acquisition (CoA) using the formula.
Calculating long-term capital gains (LTCG) arising from the sale of equity shares and equity mutual funds has become necessary for filing ITR (income tax return) as this is the first time such gains have become taxable after a long period of time.

In Budget 2018, LTCG was made taxable. This rule applies for transactions made on or after April 1, 2018 and will be applicable for FY 2018-19 onwards.

Capital gains/losses arising from sale of equity shares and equity mutual funds are said to be long-term in nature if they are held for more than one year from the date of investment. If the investments are sold before one year, then gains/losses from such sale will be called short-term capital gains/losses.

As per the new rule, tax will be levied at the rate of 10 per cent without the indexation benefit on LTCG arising from sale of equity shares and equity mutual funds if the gains in a financial year exceed Rs 1 lakh.

Formula to calculate LTCG from equity shares and equity mutual funds w.e.f 01.04.2018
To ensure that only gains/losses incurred from the date of announcement of February 1, 2018, till date of transaction are taken into account for taxation purposes, a grandfathering clause was introduced, using which long-term capital gains and losses were required to be calculated. To calculate LTCG, an individual is required to calculate cost of acquisition (CoA) using the formula mentioned below.

The CoA of the asset will be higher of:
a) The actual cost of acquisition of asset
b) The lower of: (i) fair market value of asset as on January 31, 2018, i.e., (highest value of the share on the stock market as on January 31, 2018 or when the share of last traded or NAV of unit in case of equity mutual fund) and (ii) total amount received at the time of selling of equity shares or equity mutual funds.

Confusing right? There are two steps involved to arrive at the cost of acquisition of equity share or equity mutual fund.

Step 1: Pick the lower of the following
(i) Fair market value of asset as on January 31, 2018 i.e. (highest value of the share on the stock market as on January 31, 2018 or when the share was last traded or NAV of unit on 31.01.2018 in case of equity mutual fund) and

(ii) Full value of consideration received or accruing as a result of the transfer of capital asset.

After arriving at the lower value, the next step is to pick the higher value.

Step 2: Pick the higher of the following
a) Lower value as arrived in the first step above
b) Actual cost of purchase of asset

The resultant will be the CoA for the purpose of calculating LTCG/loss. Some examples are given below.

The Central Board of Direct Taxes (CBDT) issued answers to frequently asked questions (FAQs) regarding taxation on LTCG from equity shares and equity mutual funds on February 4, 2018.

1. Please provide illustrations for computing long-term capital gains in different scenarios.
The computation of long-term capital gains in different scenarios is illustrated as under -
  • Scenario 1 - An equity share is acquired on 1st of January, 2017 at Rs. 100, its fair market value is Rs. 200 on 31st of January, 2018 and it is sold on 1st of April, 2018 at Rs. 250.

As the actual cost of acquisition is less than the fair market value as on 31st of January, 2018, the fair market value of Rs. 200 will be taken as the cost of acquisition and the long-term capital gain will be Rs. 50 (Rs. 250 - Rs. 200).

  • Scenario 2 - An equity share is acquired on 1st of January, 2017 at Rs. 100, its fair market value is Rs. 200 on 31st of January, 2018 and it is sold on 1st of April, 2018 at Rs. 150.

In this case, the actual cost of acquisition is less than the fair market value as on 31st of January, 2018. However, the sale value is also less than the fair market value as on 31st of January, 2018. Accordingly, the sale value of Rs. 150 will be taken as the cost of acquisition and the long-term capital gain will be NIL (Rs. 150 - Rs. 150).

  • Scenario 3 - An equity share is acquired on 1st of January, 2017 at Rs. 100, its fair market value is Rs. 50 on 31st of January, 2018 and it is sold on 1st of April, 2018 at Rs. 150.

In this case, the fair market value as on 31st of January, 2018 is less than the actual cost of acquisition, and therefore, the actual cost of Rs. 100 will be taken as actual cost of acquisition and the long-term capital gain will be Rs. 50 (Rs. 150 - Rs. 100).

  • Scenario 4 - An equity share is acquired on 1st of January, 2017 at Rs. 100, its fair market value is Rs. 200 on 31st of January, 2018 and it is sold on 1st of April, 2018 at Rs. 50.

In this case, the actual cost of acquisition is less than the fair market value as on 31st January, 2018. The sale value is less than the fair market value as on 31st of January, 2018 and also the actual cost of acquisition. Therefore, the actual cost of Rs. 100 will be taken as the cost of acquisition in this case. Hence, the long-term capital loss will be Rs. 50 (Rs. 50 - Rs. 100) in this case.

2. What is the meaning of long term capital gains under the new tax regime for long term capital gains?
Long term capital gains mean gains arising from the transfer of long-term capital asset. The Finance Bill, 2018 proposes to provide for a new long-term capital gains tax regime for the following assets-
i. Equity Shares in a company listed on a recognised stock exchange;
ii. Unit of an equity oriented fund; and
iii. Unit of a business trust.

The proposed regime applies to the above assets, if-
a. the assets are held for a minimum period of twelve months from the date of acquisition; and
b. the Securities Transaction Tax (STT) is paid at the time of transfer. However, in the case of equity shares acquired after 1.10.2004, STT is required to be paid even at the time of acquisition (subject to notified exemptions).

3. What are the modes of acquisition of equity shares which are proposed to be exempted from the condition of payment of STT?

The Central Government had exempted certain modes of acquisition of equity shares for the purposes of clause (38) of section 10 of the Act vide notification no. 43/2017 dated 5th of June, 2017. This notification is proposed to be reiterated for the purposes of clause 31 of the Finance Bill, 2018 after its enactment.

4. What is the point of chargeability of the tax?
The tax will be levied only upon transfer of the long-term capital asset on or after 1st April, 2018, as defined in clause (47) of section 2 of the Act.

5. What is the method for calculation of long-term capital gains?
The long-term capital gains will be computed by deducting the cost of acquisition from the full value of consideration on transfer of the long-term capital asset.

6. How do we determine the cost of acquisition for assets acquired on or before 31st January, 2018?
The cost of acquisition for the long-term capital asset acquired on or before 31st of January, 2018 will be the actual cost.

However, if the actual cost is less than the fair market value of such asset as on 31st of January, 2018, the fair market value will be deemed to be the cost of acquisition.

Further, if the full value of consideration on transfer is less than the fair market value, then such full value of consideration or the actual cost, whichever is higher, will be deemed to be the cost of acquisition.

7. How will the fair market value be determined?
In case of a listed equity share or unit, the fair market value means the highest price of such share or unit quoted on a recognized stock exchange on 31st of January, 2018.

However, if there is no trading on 31st January, 2018, the fair market value will be the highest price quoted on a date immediately preceding 31st of January, 2018, on which it has been traded.
In the case of unlisted unit, the net asset value of such unit on 31st of January, 2018 will be the fair market value.

8. Whether the cost of acquisition will be inflation indexed?
Sub-clause (5) of clause 31 of the Finance Bill, 2018, inter alia, provides that the long-term capital gain will be computed without giving effect to the provisions of the second provisos of section 48. Accordingly, it is clarified that the benefit of inflation indexation of the cost of acquisition would not be available for computing long-term capital gains under the new tax regime.

9. What is the date of commencement of the proposed new tax regime?
The proposed new tax regime will apply to transfer made on or after 1st April, 2018. The existing regime providing exemption under clause (38) of section 10 of the Act will continue to be available for transfer made on or before 31st March, 2018.

10. What will be the tax treatment of accrued gains upto 31st January 2018?
As the fair market value on 31st January, 2018 will be taken as cost of acquisition (except in some typical situations explained in examples above), the gains accrued upto 31st January, 2018 will continue to be exempt.

11. What will be the tax treatment of transfer of share or unit between 1st February 2018 to 31st March 2018?
As replied in answer 9, the new tax regime will be applicable to transfer made on or after 1st April, 2018, the transfer made between 1st February, 2018 and 31st March, 2018 will be eligible for exemption under clause (38) of section 10 of the Act.

12. What will be the tax treatment of transfer made on or after 1st April 2018?
The long-term capital gains exceeding Rs. 1 Lakh arising from transfer of these assets made on after 1st April, 2018 will be taxed at 10 per cent. However, there will be no tax on gains accrued up to 31st January, 2018 as explained in Ans 10.

13. What is the date from which the holding period will be counted?
The holding period will be counted from the date of acquisition.

14. Whether tax will be deducted at source in case of gains by resident tax payer?
No. There will be no deduction of tax at source from the payment of long-term capital gains to a resident tax payer.

15. Whether tax will be deducted at source in case of payment of long-term capital gains by non-resident tax payer (other than a Foreign Institutional Investor)?
Ordinarily, under section 195 of the Act, tax is required to be deducted on payments made to non-residents, at the rates prescribed in Part-II of the First Schedule to the Finance Act. The rate of deduction in the case of capital gains is also provided therein. In terms of the said provisions, tax at the rate of 10 per cent. will be deducted from payment of long-term capital gains to a non-resident tax payer (other than a Foreign Institutional Investor). The capital gains will be required to be computed in accordance with clause 31 of the Finance Bill, 2018.

16. Whether tax will be deducted at source in case of payment of long-term capital gains by Foreign Institutional Investors (FIIs)?
No. There will be no deduction of tax at source from payment of long-term capital gains to a Foreign Institutional Investor in view of the provisions of sub-section (2) of section 196D of the Act.

17. How will the gains in the case of FIIs be determined?
The long-term capital gains in case of FIIs will be determined in the same manner as explained in earlier answers in the case of resident tax payers.

18. What will be the treatment of the gains accrued upto 31st January 2018 in the case of FIIs?
In case of FIIs also, there will be no tax on gains accrued upto 31st January, 2018 as explained in Ans 10.

19. What will be the tax treatment of transfer of share or unit between 1st February 2018 to 31st March 2018 in the case of FIIs?
As explained in Ans 11, in case of FIIs also, the transfer made between 1st February, 2018 and 31st March, 2018 will be eligible for exemption under clause (38) of section 10 of the Act.

20. What will be the tax treatment of transfer made on or after 1st April 2018 in case of FIIs?
As explained in Ans 12, in case of FIIs also, the long-term capital gains exceeding Rs. 1 Lakh arising from transfer of these asset made on after 1st April, 2018 will be taxed at 10 per cent. However, there will be no tax on gains accrued upto 31st January, 2018 as explained in Ans 10.

21. What will be the cost of acquisition in the case of bonus shares acquired before 1st February 2018?
The cost of acquisition of bonus shares acquired before 31st January, 2018 will be determined as per sub-clause (6) of clause 31 of the Finance Bill, 2018. Therefore, the fair market value of the bonus shares as on 31st January, 2018 will be taken as cost of acquisition (except in some typical situations explained in examples above), and hence, the gains accrued upto 31st January, 2018 will continue to be exempt.

22. What will be the cost of acquisition in the case of right share acquired before 1st February 2018?
The cost of acquisition of right share acquired before 31st January, 2018 will be determined as per sub-clause (6) of clause 31 of the Finance Bill, 2018. Therefore, the fair market value of right share as on 31st January, 2018 will be taken as cost of acquisition (except in some typical situations explained in examples above), and hence, the gains accrued up to 31st January, 2018 will continue to be exempt.

23. What will be the treatment of long-term capital loss arising from transfer made between 1st February, 2018 and 31st March, 2018?
As the exemption from long-term capital gains under clause (38) of section 10 will be available for transfer made between 1st February, 2018 and 31st March, 2018, the long-term capital loss arising during this period will not be allowed to be set-off or carried forward.

24. What will be the treatment of long-term capital loss arising from transfer made on or after 1st April, 2018?
Long-term capital loss arising from transfer made on or after 1st April, 2018 will be allowed to be set-off and carried forward in accordance with existing provisions of the Act. Therefore, it can be set-off against any other long-term capital gains and unabsorbed loss can be carried forward to subsequent eight years for set-off against long-term capital gains.

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