LTCG- Long Term Capital Gains Tax Unlocked

LTCG- Long Term Capital Gains Tax Unlocked

LTCG that is long term capital gain tax, the concept which was reintroduced in the Budget 2018. In budget 2018, section 10(38) of Income-tax Act which previously provided the exemption from tax from long term capital gains accrued from the sale of an equity or equity-related instruments was removed and a new section 112(A) have been introduced. The section suggests tax LTCG on sale of Equity shares, Units of equity oriented funds or Units if business trusts. Lets understand the capital gain tax and LTCG in detail.

What is Capital Gain Tax?

Any gain or profit earned from the sale of a capital asset is a capital gain. The profit earned from this sale comes under income category and therefore you need to pay tax for the year in which the earnings are made from capital asset selling. The tax levied is known as capital gain tax. Capital gains are not applicable in the case of inherited properties.

The income tax Act specifically states the exemption of the assets received by a way of inheritance or a will or received as gifts. However, post the ownership gets transferred and the person who has inherited or received property decides to sell it then capital gain taxes are applicable. Capital gain taxes can be short term as well as long term. In this article, we will deal with long term capital gains more though lets go ahead and understand the basic concepts behind the Long term capital gain tax (LTCG) and Short term capital gain tax (STCG).

What is LTCG?

LTCG is nothing but the gains realized from holding an asset for more than 36 months. However, in the case of equities and equity-related mutual funds, 12 months are considered as the benchmark period. If you are holding a stock more than 12 months then you are liable for LTCG tax on the value.

Proposal And Applicability of LTCG

After the withdrawal of section 10(38), the parallel proposal of the introduction of 112A made to tax LTCG on sale of equity share, equity mutual funds or units of business trusts. The LTCG tax is levied at a concessional rate of 10% on the gains exceeding Rs. 1,00,000 without providing indexation benefits.

The provisions under this section are enforced from the Financial Year (FY) 2018-19. Simply, any transfer carried out after April 2018 would attract LTCG that is long term capital gain tax of 10% if your gains exceed Rs.1 lac.

How To Calculate Short And Long Term Capital Gains ?

Before going ahead to understand the calculation of long term and short term capital gains, one needs to understand some basic concepts which are the most important one for calculating long term capital gains.

  • Full value consideration: The consideration which is expected to be received by the seller of the asset against the transfer of the same is full value consideration. Remember, capital gains tax are chargeable in the year of transfer irrespective of the accrual of consideration.
  • Cost of acquisition: The consideration or value at which the seller has acquired the capital asset, the value is called as a cost of acquisition.
  • Cost of improvement: Cost incurred to develop or to make ani addition or alteration to capital assets is the cost of the improvement. Remember, improvements or alterations made on or before April 1, 2001, are not considered while calculating gains.

How to Calculate Short-Term Capital Gains?

  1. Firstly consider the full value of consideration of the capital asset.
  2. Deduct Expenditure incurred in sell and transfer of the asset.
  3. Deduct Cost of acquisition
  4. Deduct Cost of improvement
  5. The resultant amount is your short-term capital gain

How to Calculate Long-Term Capital Gains?

  1. Consider the full value consideration first
  2. Deduct expenses incurred for transfer or sale of an asset
  3. Deduct the indexed cost of acquisition
  4. Deduct the indexed cost of improvement
  5. Post this From the outcome deduct the exemptions provided under sections 54, 54EC, 54F, and 54B
  6. The resultant figure would be your long term capital gain

As stated in Budget 2018, LTCG that is long term capital gain tax is levied on the sale of shares or units of equity mutual funds. The tax is levied at a flat rate of 10% and is levied only on the gains earned post 31st March 2018 and are exceeding Rs. 1 lac in the same financial year. However, you are allowed to deduct the brokers commission from gains while calculating the long term capital gains. This aspect has given birth to a new concept of grandfathering. The investments made before 31st January 2018 are grandfathered while calculating LTCG. lets go ahead and understand this concept more precisely.

The Concept of Grandfathering

When a new proposal comes into force, and new policies under this proposal added to law the concept of grandfathering comes in to picture. Under this certain persons are relieved from complying with new clauses. The grandfathered person enjoys the concessions for making their decisions under previous law. For LTCG tax its proposed that investments made on or before 31 January 2018 will be grandfathered.

In the case of the sale of equity investment, grandfathering works as follows.

Here the cost of acquisition deemed to be the higher of the actual cost of acquisition and lower of the fair market value (FMV) and full value consideration (Sale price). Going ahead, here fair market value will be the highest price on the stock exchanges (BSE, NSE) on 31st January 2018. Following example can better explain this mechanism, in the simplest way a capital gain/loss, in this case, would be a difference between the sale price and revised cost of acquisition as on 31st January 2018.

Example

Mr. A bought equity shares on 15-Oct-2016 for Rs. 1,00,000. FMV of the shares was Rs. 1,20,000 as on 31-Jan-18. He sold the shares on 10-June-2018 for Rs. 1,50,000. What will be the long-term capital gain/ loss?

Here the Cost of Acquisition (COA) would be Rs.1,20,000. As discussed earlier cost of acquisition is

Higher of

  • Original COA i.e. Rs. 1,00,000, and

Lower of

  • FMV on 31.1.18 i.e. Rs. 1,20,000, and
  • Sale Price i.e. Rs. 1,50,000

Hence, COA = Higher of original COA and FMV (Rs. 1,00,000 or Rs. 1,20,000) = Rs. 1,20,000

Therefore Capital Gain/ (Loss) here would be

  • Sale Price - Cost of Acquisition
  • Rs. 1,50,000 - Rs. 1,20,000 = Rs. 30,000

After understanding the mechanism of calculating your long term capital gains one need to understand the tax implications for these long term gains, and how they will be taxed in your hand in various scenarios.

  • Scenario 1: If you have purchased and sold your securities before 31st January 2018
  • Tax Implication: Gains would be fully exempt under Section 10(38)
  • Scenario 2: If you have purchased securities before 31st January 2018 and sold them before 30th April
    2018 and post 31st January 2018.
  • Tax Implication: Gains would be fully exempt under section 10(38).
  • Scenario 3: If you have purchased securities before 31st January 2018 and sold them after 30th April 2018.
  • Tax Implication: Here LTCG is taxable, however for the gains earned before the 31/01/2018 are exempt and gains earned post that is taxable at 10%. Capital gains are calculated as discussed above.
  • Scenario 4: If you have purchased securities after 31st January 2018 and sold them after 30th April 2018.
  • Tax Implication: LTCG taxes are levied in this scenario, and the gains would be calculated as discussed earlier in this article.
  • LTCG on Bonus and Righ Share Transfer

    For bonus share and right share transfers, LTCG will be determined by considering the fair market value of the asset as on 31st January 2018 exempting gains until 31st January 2018 from tax.

    Treatment of Long Term Capital Losses

    As per the income tax department FAQs dated 4 February 2018, it is stated that long term capital losses incurred from transfer made on or after 1 April 2018 are allowed to carry forward. Therefore, these losses can be set-off against any other long term capital gains (LTCGs) however, unabsorbed losses can be again carried forward to subsequent 8 years for set-off against LTCG.

    Long term capital gain (LTCG) tax can change your tax equations for the year. So its highly advised to understand it very well and play smartly while booking your profits. If you still find it difficult to plan then call us at 09637171436 we are there to help you to manage your finances wisely yet smartly.

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