While presenting Budget 2018, one of the biggest announcements made by the government was to bring back Long Term Capital Gains Tax on equity investments. This had been removed in October 2004, and a new Securities Transaction Tax had been introduced at the time. According to a circular from the Central Board of Direct Taxes (CBDT),
In order to minimise economic distortions and curb erosion of tax base, it is proposed to withdraw the exemption under clause (38) of section 10 and to introduce a new section 112A in the Income-tax Act, 1961 (‘the Act’) vide clause 31 of the Finance Bill, 2018 so as to provide that long-term capital gains arising from transfer of such long-term capital asset exceeding one lakh rupees will be taxed at a concessional rate of 10 percent.
There is also a ‘grandfathering’ exemption clause mentioned which means existing gains from sale of equity shares or mutual fund units till January 31, 2018 will be exempt from long term capital gains tax.
This long term capital gains tax will be levied only on transfer of shares from April 1, 2018 and such gains will be calculated by deducting the acquisition cost from the sale value. Given below are four cases to illustrate how this would work:
The Long Term Capital Gains Tax impact
– There will be no indexation benefit allowed on acquisition cost
– Exemption from long term capital gains tax will be available till March 31, 2018
– Fair market value will be the highest price of a share or unit quoted on a recognised stock exchange on January 31, 2018
– Fair market value as on January 31, 2018 will be taken as acquisition cost for bonus shares or a rights issue
– Long term capital loss (incurred from sale of shares/units held for over 1 year) after April 1, 2018 can be set off against any other long term capital gains and carried forward for eight years