Long Term Capital Gains (LTCG) on the Sale of Stocks, Shares etc.

Budget 2018 proposed to remove Section 10 (38) of the Income Tax Act 1961. As per this section, the long-term capital gains (LTCG) arising on the sale of equity shares or units of an equity-oriented mutual fund on which Securities Transaction Tax (STT) is paid were exempt from taxation. 

Budget 2024 Updates

Budget 2024 has proposed the following amendments effective from FY 24-25 - 

• The holding period for all listed securities has been reduced to 12 months for considering the same as long term capital assets. The holding period for all other assets is 24 months
• The tax rate on any long term capital gains has been changed to 12.5% for transfers made on or after 23rd July, 2024.
• The exemption limit under Section 112A has been increased to Rs. 1.25 lakhs in a financial year.

What is Section 112A?

Section 112A allows long-term capital gains on the sale of listed equity shares, equity-oriented mutual funds, and business trust units to be taxed. Following the abolition of the exemption under section 10(38), the said section was introduced in Budget 2018. It is effective beginning with the fiscal year 2018-19. It provides for a 10% tax (12.5% from 23rd July, 2024) on long-term capital gains on listed stocks that surpass a Rs.1 lakh (Rs. 1.25 lakhs from FY 24-25) threshold. The schedule for Section 112A of the Income Tax Act, which requires the taxpayer to fill out the scripwise data of securities sold during the year, is included in the income tax form.

Scope of Section 112A

The following conditions apply for availing the benefit of the concessional rate under section 112A of Income-tax Act,1961:

1. The securities transaction tax (STT) has been paid on the acquisition and transfer of an equity share of a corporation.
2. The STT was paid when the asset was sold in the case of units of an equity-oriented fund or units of a business trust.
3. The securities should be long-term capital assets (i.e., held for more than 12 months).
4. No deduction under Chapter VI A is available for such long-term capital gain.
5. A rebate under section 87A cannot be claimed in respect of long-term capital gain tax due under section 112A.

Applicability of Section 112A

The provisions of this section will apply from the financial year (FY) 2018-19, i.e. AY 2019-20. This otherwise means any transfer carried out after 1 April 2018, resulting in LTCG above Rs 1 lakh, will attract tax at the rate of 10%. The tax rate has been increased to 12.5% from 23rd July, 2024 and the limit of Rs. 1 lakh has been increased to Rs. 1.25 lakhs.

Grandfathering Provisions Under Section 112A of Income-tax Act

In the Budget 2018, there has been a proposal to Grandfather investments made on or before 31 January 2018. 

What is the concept of Grandfathering? 

When a new clause or policy is added to a law, certain persons may be relieved from complying with the new clause. This is called “grandfathering”. “Grandfathered” persons enjoy the right to avail the concession because they have made their decisions under the old law. 

The concept of grandfathering in the case of LTCG on the sale of equity investments works as follows:

A method of determining the Cost of Acquisition (COA) of such investments has been specifically laid down as per the said method, COA of such investments shall be deemed to be the higher of:

• The actual COA of such investments; and
• The lower of-
  • Fair Market Value (‘FMV’) of such investments; and
  • the Full Value of Consideration received or accruing as a result of the transfer of the capital asset i.e. the Sale Price

Further, the FMV would be the highest price quoted on the recognised stock exchange on 31 January 2018. 

In case there is no trading of the said asset in such stock exchange, the highest price on a day immediately preceding 31 January 2018 shall be considered to be the FMV. In effect, the taxpayer can claim the highest price quoted on the recognised stock exchange on 31 January 2018 as the COA and claim the deduction for the same. 

The computation mechanism has been further explained by way of the following examples

Capital Gain/ Loss = Sale Price – Revised Cost of Acquisition on 31.1.2018

Example 1

Mr X bought equity shares on 15th Dec 2016 for Rs. 10,000. FMV of the shares was Rs. 12,000 as of 31st Jan, 18. He sold the shares on 10th May 2020 for Rs. 15,000. What will be the long-term capital gain/ loss?

Cost of Acquisition (COA) 

Higher of –

• Original COA i.e. Rs. 10,000, and  
• Lower of –
  • FMV on 31.1.18 i.e. Rs. 12,000, and
  • Sale Price i.e. Rs. 15,000

Hence, COA = Higher of (Rs. 10,000 or Rs. 12,000) Rs. 12,000

 Capital Gain/ (Loss)

• Sale Price – Cost of Acquisition
• Rs. 15,000 – Rs. 12,000
• Rs. 3,000

Example 2

Mr A purchased equity shares on 20th Jan 2018 for Rs. 16,000. FMV of the shares was Rs. 11,000 as of 31st Jan, 2018. He sold the shares on 26th Apr 2022 for Rs. 26,000. What will be the long-term capital gain/ loss?

Cost of Acquisition (COA) 

Higher of –

• Original COA, i.e. Rs. 16,000, and  
• Lower of –
  • FMV on 31.1.18, i.e. Rs. 11,000, and
  • Sale Price, i.e. Rs. 26,000

Hence, COA = Higher of (Rs. 16,000 or Rs. 11,000) Rs. 16,000 

Capital Gain/ (Loss)

• Sale Price – Cost of Acquisition
• Rs. 26,000 – Rs. 16,000
• Rs. 10,000

Example 3

Mr. D bought equity shares on 11th Nov 2016 for Rs. 19,500. FMV of the shares was Rs. 12,000 as of 31st Jan, 2018. He sold the shares on 21st May 2018 for Rs. 9,000. What will be the long-term capital gain/ loss?

Cost of Acquisition (COA) 

Higher of –

• Original COA i.e. Rs. 19,500, and  
• Lower of –
  • FMV on 31.1.18 i.e. Rs. 12,000, and
  • Sale Price i.e. Rs. 9,000

Hence, COA = Higher of (Rs. 19,500 or Rs. 9,000) Rs. 19,500 

Capital Gain/ (Loss)

• Sale Price – Cost of Acquisition
• Rs. 9,000 – Rs. 19,500
• Rs. (10,500)

Example 4

Mr. D bought equity shares on 23rd Oct, 2016 for Rs. 14,500. FMV of the shares was Rs. 18,000 as on 31st Jan 2018. He sold the shares on 18th May, 2018 for Rs. 7,000. What will be the long-term capital gain/ loss?

Cost of Acquisition (COA) 

Higher of –

• Original COA i.e. Rs. 14,500, and  
• Lower of –
  • FMV on 31.1.18 i.e. Rs. 18,000, and
  • Sale Price i.e. Rs. 7,000

Hence, COA = Higher of (Rs. 14,500 or Rs. 7,000) Rs. 14,500 

Capital Gain/ (Loss)

• Sale Price – Cost of Acquisition
• Rs. 7,000 – Rs. 14,500
• Rs. (7,500)

Example 5

Mr J bought equity shares on 13th Nov 2010 for Rs. 12,000. FMV of the shares was Rs. 30,000 as of 31st Jan, 2018. He sold the shares on 11th May 2019 for Rs.25,000 What will be the long-term capital gain/ loss?

Cost of Acquisition (COA) 

Higher of –

• Original COA i.e. Rs. 12,000, and
• Lower of below i.e Rs. 25,000-
  • FMV on 31.1.18 i.e. Rs. 30,000, and
  • Sale Price i.e. Rs. 25,000

Hence, COA = Higher of (Rs. 12,000 or Rs. 25,000) Rs. 25,000 

Capital Gain/ (Loss)

• Sale Price – Cost of Acquisition
• Rs. 25,000 – Rs. 25,000
• Nil

Given below is further analysis of the LTCG implications of certain other scenarios, which will help understand the proposed amendment better:

Note: The above table has been prepared with a presumption that all gains are long-term.

LTCG on Transfer of Bonus and Rights Shares Acquired on or Before 31 January 2018

The LTCG for these shares shall be calculated by considering the FMV on 31st January 2018 as the COA of such shares, thereby exempting gains until 31st January 2018 from tax.

Eg: You have Reliance shares purchased on 1st April 2016 and issued bonus shares as on 1st April 2017. Now if such bonus shares are sold after 31st Jan 2018, then FMV as of 31st Jan 2018 will be considered as the Cost of acquisition of such shares.

Carry Forward of Long-Term Capital Losses (LTCL) on Sale of such Shares

If the net result for any assessment year is a loss, other than a capital gain, the assessee is entitled to have the amount written off against his income from any other source under the same head.

 A short-term capital loss might be set off against any capital gain in the case of capital losses. As a result, a short-term capital loss can be set off against both a short-term capital loss and a long-term capital loss.  Long-term capital loss, on the other hand, may only be offset against long-term capital gain.

Long-term capital gains resulting from the transfer of equity shares listed on a recognised stock exchange are currently taxed at 10%. If any long-term capital losses result from the selling of such equity shares, such losses may now be set off against the other long-term capital gain.

Fair Market Value

a. The Fair Market Value (FMV) of a listed security is the highest price quoted on a recognised stock market.

b. If the security was not traded on 31 January 2018, the FMV is the highest price quoted on a date immediately before 31 January 2018 when the security was traded on a recognised stock exchange.

c. In the case of unlisted units on January 31, 2018, the net asset value of the units on that date.

d. The FMV of an equity share listed after January 31 2018, or acquired through a merger or other transfer under Section 47 will be: Purchase price *Cost inflation index for fiscal year 2017-18 / Cost inflation index for the year of purchase or fiscal year 2001-02.

Reconciliation of Capital Gain statement vs AIS

As part of its digital initiative, the Income tax department have started receiving the details on the sale of your shares  directly from Depositories like CDSL and NSDL. Such data is reflected in your AIS - Annual Information Statement.

Thus it is very important that you reconcile the capital gain statement that you have with the data available in AIS before you file your ITR. Any Mismatch in ITR and AIS will result in a notice from the Income tax department

Rebate under 87A

Rebate under Section 87A of the Income Tax Act is allowed on income tax computed on all income, excluding the income tax payable on such LTCG.

Final Words

To compensate for the shortfall in the GST collection, the government has probably taken the step of imposing a levy of taxes on shares held for the long term. This is, of course, over and above the already existing Securities Transaction Tax (STT) which was introduced in the year 2004 to check instances of capital gains tax evasion.

Overall, the levy of both LTCG tax and STT seems quite unfair. The main question remains unanswered: “How far this move will contribute to yielding a higher revenue to the government, which is the underlying objective of this move?”