Long Term Gain Tax on shares is back- Time to know the Tax Implications
“Total amount of exempted capital gain from listed shares and units is around 3,67,000 Cr as per return filed for the AY 2017-18. Major part of this gain has accrued to corporate & LLP.”– Arun Jaitley- Finance Minister (Extract from FM Speech)
After 14 years of exemption, Tax on Long Term Capital Gain (LTCG) on sale of shares is proposed to be re-introduced with flat tax rate of 10% without any indexation benefit. Thankfully, the period of holding for reckoning the shares as Long Term Capital assets is still kept intact as one year. Securities Transactions Tax (STT) introduced for abolishing LTCG on shares will continue & tax rate of Short term capital gain @ 15% has remained unchanged.
There are rumours that the tax rate might be reduced to 7.50% or so. But, let us understand that every Government needs money to run the social welfare scheme and 10% is still minimal considering the fact that it is profit out of investments.
Lot many confusions and doubts have emerged as far as the taxability of the LTCG on shares is concerned. Let us have a look over it:
Shares sold till 31.03.2018 will continue to be exempt:
Shares sold up to 31.03.2018 will continue to enjoy the exemption. The date of 31st January 2018 announced in the budget is only for computing LTCG on shares sold after 31.03.2018. It doesn’t have any tax implication on transactions from 01.02.2018 to 31.03.2018. Taxpayer can validly book LTCG on their existing investment before 31st March 2018 also.
Exemption up to Rs. 1 Lakh:
LTCG on sale of shares is exempt from tax up to Rs. 1 Lakh p.a. Effectively, if a person earn LTCG of Rs. 1.25 on sale of shares, only Rs. 25,000/- would be subject to tax @10%. It leaves a scope to plan the transactions in such a way that LTCG in a year is around Rs. 1 Lakh p.a by planning (a) timing of the transactions (b) selling the loss making script also to reduce the taxable profit. Further, taxpayer need to know at this juncture that short term capital loss can be set off against Long term capital gain.
Shares are sold after 31st March 2018:
An innovative concept of taxation is introduced so as exempt the amount of LTCG up to 31.01.2018. Accretion in the value of shares from the date of acquisition to 31.01.2018 will not be taxable due to grandfathering of it in the finance bill. Its only incremental value of shares after 31.01.2018 that would be taxable @10%. For example, a person has purchased a share in January-2017 for Rs. 100/-, Rate as on 31.01.2018 is Rs. 250/- and has sold it in April-2018 for Rs. 300/-. In this case, Taxable LTCG would be Rs. 50/- only as the accretion in the value of the shares up to 31.01.2018 (i.e., Rs. 150/-) is proposed to be grandfathered.
ELSS vs. ULIP:
ELSS is an equity oriented fun and so long term capital gain arising on redemption of ELSS will also be taxable. However, ULIP, being an insurance product, will not be affected by the present amendment and its gain will continue to be exempt.
Deduction against LTCG:
No deduction u/s 80C, 80D is available against LTCG. Similarly, no relief u/s 87A is admissible against LTCG on shares.
How to compute LTCG:
The capital gain calculation would still remain a tricky issue as cost of acquisition for working out LTCG would be higher of
- Actual cost of acquisition
- Lower of (i) Highest price of share on stock exchange on 31.01.2018 or (ii) sale value received on sale of shares.
Following chart summarizes computation under various scenarios:
|Stock purchased on 10.01.2017 (a)||100||100||100||100||100||100|
|Highest quoted price on 31.01.2018 (b)||250||50||50||200||60||500|
|Sale price on 01.04.2018 (c)||325||150||90||150||25||125|
|Deemed cost of acquisition
Higher of [a] or [lower of (b) or (c)]
|Taxable Long Term Capital Gain/ (Loss)||75||50||(10)||0||(75)||0|
Amidst lot of noise, I must say that everything is not bad with the new taxation provision. If there is a Long term capital loss now then the same is available for set off against other long term capital gain. LTCG is no more exempt from tax and so losses will be freely allowed to be set off against LTCG gains. All major economies have LTCG tax on shares. Even after LTCG Tax, equity investment is still considered as the best asset class. From tax free to taxable status, 10% is still cheaper considering the fact that general tax rate of LTCG on other assets is 20%.
CA. Naresh Jakhotia
Director !! Partner:
www.theTAXtalk.com !! SSRPN & CO.