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 sale of equity shares or units of an equity-oriented mutual fund on which Securities Transaction Tax (STT) is paid was exempt from taxation.
Section 112A allows long-term capital gains on the sale of listed equity shares, equity-oriented mutual funds, and business trust units. Following the abolition of the exemption under section 10(38), the said section was established in Budget 2018. It is effective beginning with the fiscal year 2018-19. It provides for a 10% tax on long-term capital gains on listed stocks that surpass a Rs.1 lakh 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.
The following conditions apply for availing the benefit of the concessional rate under section 112A of Income Tax Act:
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 investments.
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.
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%.
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 concession because they have made their decisions under the old law.
The concept of grandfathering in the case of LTCG on sale of equity investments works as follows:
A method of determining the Cost of Acquisition (COA) of such investments have been specifically laid down as per the COA of such investments shall be deemed to be the higher of:
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
Mr X bought equity shares on 15th Dec, 2016 for Rs. 10,000. FMV of the shares was Rs. 12,000 as on 31st Jan, 18. He sold the shares on 10th May, 2018 for Rs. 15,000. What will be the long-term capital gain/ loss?
Cost of Acquisition (COA)
Higher of –
Hence, COA = Higher of (Rs. 10,000 or Rs. 12,000) Rs. 12,000
Capital Gain/ (Loss)
Mr. A purchased equity shares on 20th Jan, 2017 for Rs. 16,000. FMV of the shares was Rs. 11,000 as on 31st Jan, 2018. He sold the shares on 26th Apr, 2018 for Rs. 26,000. What will be the long-term capital gain/ loss?
Cost of Acquisition (COA)
Higher of –
Hence, COA = Higher of (Rs. 16,000 or Rs. 11,000) Rs. 16,000
Capital Gain/ (Loss)
Mr. D bought equity shares on 11th Nov, 2016 for Rs. 19,500. FMV of the shares was Rs. 12,000 as on 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 –
Hence, COA = Higher of (Rs. 19,500 or Rs. 9,000) Rs. 19,500
Capital Gain/ (Loss)
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 –
Hence, COA = Higher of (Rs. 14,500 or Rs. 7,000) Rs. 14,500
Capital Gain/ (Loss)
Mr. J bought equity shares on 13th Nov, 2010 for Rs. 12,000. FMV of the shares was Rs. 30,000 as on 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 –
Hence, COA = Higher of (Rs. 12,000 or Rs. 25,000) Rs. 25,000
Capital Gain/ (Loss)
Given below is further analysis of the LTCG implications of certain other scenarios which will help understand the proposed amendment better:
Sl No | Scenario | Tax Implications |
1 | Purchase and sale before 31/1/2018 | Exempt under Section 10(38) |
2 | Purchase before 31/1/2018 Sale after 31/1/2018 but before 1/4/2018 | Exempt under Section 10(38) |
3 | Purchase before 31/1/2018 Sale on or after 1/4/2018 | LTCG taxable. Gains accrued before 31/1/2018 exempt. Capital Gains computed in the manner as discussed above |
4 | Purchase after 31/1/2018 Sale on or after 1/4/2018 | LTCG taxable. Capital Gains computed in the manner as discussed above |
Note: The above table has been prepared with a presumption that all gains are long term.
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.
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 offset 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.
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.
There is also a proposal to allow the deduction under Section 87A of the Income Tax Act on income tax computed on all income, excluding the income tax payable on such LTCG.
To compensate for the shortfall in the GST collection, the government has probably taken this 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?”
Yes, tax will be applicable at 10% of your gains if the gains exceed 1 lakh rupees. And gains will be calculated as shown above.
Yes you can set off your losses against other Long Term Capital Gains or carry forward them.