A 10% tax on long-term capital gains from selling of shares/mutual funds has been announced in Budget.
What is the new long-term capital gains tax on equity oriented mutual funds and stocks? This new 10 per cent tax on long-term capital gains (LTCG) on equity mutual fund investment and stocks/shares was proposed by the finance minister in Budget 2018. In this context, long-term capital gains mean gain or profit arising from selling of stock or redemption of equity mutual funds held more than one year. Remember that a mutual fund has at least 65 per cent allocation to equities is termed an equity mutual fund for taxation purposes. (Also read: Waiver On LTCG Tax To End On 31 March)
If the investor has incurred a loss, there is no LTCG tax to be paid.
When will the new LTCG tax become effective?
What is the new LTCG tax rate on equity mutual funds/stock market investments?
The long-term capital gains exceeding Rs 1 lakh arising from redemption of mutual fund units or equities on or after April 1, 2018 will be taxed at 10 per cent (plus cess). This includes long-term capital gains earned from your equity or mutual fund investments put together in a financial year. Suppose you earn Rs 2 lakh in combined long-term capital gains from stocks or mutual fund investments in a financial year. The taxable long-term capital gains will be Rs 1 lakh (Rs 2 lakh - Rs 1 lakh) and tax liability will be Rs 10,000 (10 per cent of Rs 1 lakh)
Set-off or carry forward benefits
Long-term capital loss arising from sale or redemption on or after April 1, 2018, will be allowed to be set-off and carried forward. 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.
However, remember that since tax exemption is available on long-term capital gains on units sold till March 31, 2018, the long-term capital loss arising during this period will not be allowed to be setoff or carried forward.
How to calculate long-term capital gains?
The long-term capital gain is calculated by reducing the cost of acquisition from the redemption value of mutual funds or stocks.
How do calculate the cost of acquisition for assets acquired on or before January 31, 2018?
First, you need to know about fair market value (FMV) of the particular equity investment as on January 31, 2018. 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 January 31, 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.
According to the income tax department, 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 considered to be the cost of acquisition.
Further, if the full value of consideration on sale is less than the fair market value, then such full value of consideration or the actual cost, whichever is higher, will be considered to be the cost of acquisition.
Scenario 1
Purchase price on January 1, 2017 is Rs 100
Price on January 31, 2018, is Rs 200
Sold on March 31, 2018, at Rs 250
Since it is sold on or before March 31, 2018, there is no tax liability
Scenario - 2
Purchase price on January 1, 2017 is Rs 100
Price on January 31, 2018, is Rs 200
Sold on April 1, 2018, at Rs 250
As the investment is sold after March 31, it will attract long-term capital gains. Since 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 3
Purchase price as on January 1, 2017 is Rs. 100
Fair market value is Rs. 200 on 1st of January, 2018
Sold on 1st of April, 2018 at Rs 150
The actual cost of acquisition is less than the fair market value as on 31st of January, 2018. The sale value is also less than the fair market value as on 31st of January, 2018. So, 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 4
Purchase price on 1st of January, 2017 is Rs 100
Fair market value is Rs. 50 on 31st of January, 2018
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. So 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 5
Purchase price on 1st of January, 2017 at Rs. 100
Fair market value on 31st of January, 2018 is Rs. 200
Sold on 1st of April, 2018 at Rs. 50
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.
