Long-Term Capital Gains Tax On Stocks, Mutual Funds Explained In 10 Points

The long term capital gains tax (LTCG) will be levied only on transfer of the long-term capital asset on or after 1 April, 2018, as mentioned in the Budget 2018

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Long-Term Capital Gains Tax On Stocks, Mutual Funds Explained In 10 Points

LTCG will be computed by deducting acquisition cost from the value of consideration


The income tax (I-T) department solves the maze revolving around the long term capital gains (LTCG) tax in very comprehensive frequently asked questions (FAQs) posted on Sunday. The FAQs aim to answer an array of doubts in the minds of investors and traders pertaining to the chargeability of capital gains (CG) tax and also to the quantum of exemptions given for the gains accrued up to January 31. There are queries as to the chargeability of tax on the capital gains income when the market price as on January 31 falls short of the cost of acquisition of equity assets. There has also been a degree of uncertainty of treatment of earnings made on the sale of assets between January 31 and the culmination of current financial year, March 31, 2018.

Long Term Capital Gains Tax On Equity: Ten Things To Know

 

1. 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: Equity Shares in a company listed on a recognized stock exchange; Unit of an equity oriented fund; and Unit of a business trust. The proposed tax applies to the above assets, if the assets are held for a minimum period of twelve months from the date of acquisition; and 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).

2. The long term capital gains tax will be levied only on transfer of the long-term capital asset on or after 1 April, 2018, as defined in clause (47) of section 2 of the Income Tax Act.

3. 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.

4. The cost of acquisition for the long-term capital asset acquired on or before 31 January, 2018 will be the actual cost. However, if the actual cost is less than the fair market value of such asset as on 31January, 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.

5. 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 31 January, 2018. However, if there is no trading on 31 January, 2018, the fair market value will be the highest price quoted on a date immediately preceding 31of January, 2018, on which it has been traded. In the case of unlisted unit, the net asset value of such unit on 31 of January, 2018 will be the fair market value.

6. When market value more than cost of acquisition (case 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 31 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).

When sale price is less than cost of acquisition (case 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).

When market value is lower than cost of acquisition (case 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).

When sale value is less than cost of acquisition (case 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.

7: 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.

8. The proposed new tax regime will apply to transfer made on or after 1 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 31 March, 2018.

9. As the fair market value on 31 January, 2018 will be taken as cost of acquisition, the gains accrued upto 31 January, 2018 will continue to be exempt.

10: Rate of taxation: The long-term capital gains exceeding Rs 1 lakh arising from transfer of these asset made on after 1 April, 2018 will be taxed at 10 per cent. However, there will be no tax on gains accrued upto 31 January, 2018. The holding period will be counted from the date of acquisition.



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