Honourable Finance Minister Arun Jaitley has proposed the few amendments in the Taxability of Long Term Capital Gain Taxes in case of Transfer of Shares or Units through the recently announced Financed Budget 2018.

The long term capital gain changes are being proposed and suggested to rationalise the taxation of long term capital gains in all the classes of assets. Amid falling in the stock market index, top finance ministry official said that currently there were two concessions available to the investors reporting gains from investment exchange traded equity shares.

Therefore, the government had decided to tap into the massive gains of INR 3.67 Lakh Crore, which has been remained untaxed until last year only if the investments were sold after holding them for over 12 Months.

“There are two concessions in which Short Term Capital gains tax is 15% instead of the normal marginal tax rate that investors pay and secondly Long-Term Capital is only 10% instead of 20% for other asset classes. Therefore, due to the special dispensation, we are continuing STT (securities transaction tax),” Finance Ministry official said.

Further, the ‘Grandfathering’ of taxation in the Long Term Capital Gains of 10% is taken care of by the Finance Minister wherein it is to be clarified that all the Long Term Capital Gains that accrue or arise to investors till 31st Jan 2018 shall not be taxable and only Long Term Capital Gains accrue or arise after 31st Jan 2018 shall be chargeable to tax at 10%.

Long term capital gain changes in budget 2018:

Now let us dig into little dipper to under the changes being proposed by the Finance Minister:

  • Tax on long Term Capital Gain of listed shares which were sold by paying STT was exempt u/s 10(38). The said exemption shall be withdrawn w.e.f. AY 2019-20. Also the Grandfathering of the amendment is also taken care of as discussed above.
  • New section 112A to been inserted to provide that, the long term capital gains arising from transfer of a long term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust to be taxed at 10% exceeding Rs. 1 Lakhs.

 

In this case, we can say that Small Investors who generally invest in Mutual Funds or Equity Shares will be benefited as there will be no Long Term Capital Gain up-to 31st Jan 2018.

  • This concessional rate of 10 %. will be applicable to such long term capital gains in a case where long term capital asset in the nature being:
    • Equity share is subject to Securities Transaction Tax (STT) being paid at both the time of acquisition as well as transfer;
    • Unit of an Equity Oriented Fund or a Unit of a Business Trust is subject to STT being paid at the time of transfer
  • Further, it is pertinent to note that benefit of Cost Inflation Index shall not be available
  • Also, benefit of computation of capital gains in foreign currency in the case of a non-resident, will not be available
  • Central Government would notify certain nature of acquisitions in respect of which the requirement of payment of STT shall not apply. Also, STT payment would not be a condition in case if the transfer is undertaken on the recognized stock exchange located in any International Financial Services Centre (IFSC) and the consideration of such transfer is received or receivable in foreign currency.
  • Cost of acquisitions in respect of the long-term capital asset acquired by the assesse before the 1st day of February 2018, shall be deemed to be the higher of –
    • Actual cost of acquisition of such asset; and
    • Lower of –
      • Fair market value of such asset as on 31st January 2018; and
      • Full value of the consideration received or accruing as a result of the transfer of the capital asset.
    • “Equity oriented fund” has been defined to mean a fund set up under a scheme of a mutual fund specified u/s 10 (23D) and :
      • In a case where the fund invests in the units of another fund which is traded on a recognized stock exchange
        • A minimum of 90 % of the total proceeds of such funds is invested in the units of such other fund; and
        • Such other fund also invests a minimum of 90 %. of its total proceeds in the equity shares of domestic companies listed on the recognized stock exchange; and
      • In any other case, a minimum of 65 % of the total proceeds of such fund is invested in the equity shares of domestic companies listed on the recognized stock exchange.
    • No deduction under chapter VIA shall be allowed from such capital gains. Similarly, the rebate under section 87A shall not be allowed from the income tax on such capital gains
    • Section 115AD is also to amend, and long term capital gain will become taxable in the hands of FIIs also. As in the case of domestic investors, the FIIs will also be liable to tax on such long-term capital gains only in respect of the amount of such gains exceeding Rs. 1 Lakhs.

Let us understand the logic behind the implication of such a taxation. It can be understood through an Illustration given below:

HIGHER LTCG TAX RATE + INDEXATION COULD LEAD TO LOWER TAX PAYMENTTake the Following Assumptions for an illustration:1)      There is a Total Investment of INR 10, 00, 000/- made on 1st April 2018 for 3 Years2)      Return would be 10%3)      Cost Inflation Index is 6%

 

YearCapital GainsClosing BalanceTaxable Capital Gains (Post Budget 2018)If Indexation available after 3 Years
01, 00, 00011, 00, 000
11, 10, 00012, 10, 000
21, 21, 00013, 31, 0003, 31, 0001, 39, 984
Tax Rate10%20%
Tax33, 10027, 997

 

Note: After such a change there will be savings of 15% in the Tax of INR 5103

 

 

The changes proposed by the Finance Ministry are after a lot of stakeholders suggested the amendment including the Finance Secretary who believes that this amendment will bring the rationalisation in the long term capital gains for all asset of classes.