Union Budget 2018 has been announced and it has come up with a major announcement for the equity market stakeholders. The government has brought back the long term capital gains (LTCG) tax on equity and equity oriented mutual fund investments.
From Feb 1, 2018 onwards, all the capital gains from sale of equity shares and equity oriented mutual funds exceeding Rs 1 lakh, held over a year, will be taxed at 10%. If these gains do not exceed Rs 1 lakh, no tax will be levied on the gains. This means that anyone who sells equity oriented mutual fund units or equity shares after holding them for one year and ends up earning more than 1 lakh, will have to pay a tax at the rate of 10%.
For ex, if a person purchases equity shares worth Rs 5 lakh and after one year, sells it at Rs 6.01 lakh then LTCG tax will be applicable on the earnings made, which is worth Rs. 1.01 lakh. As for the short-term capital gains (STCG) i.e. the gains accrued on equity shares and mutual funds sold in a period less than one year, the previous STGC tax rate of 15% will still be applicable. Also, the securities transaction tax (STT) of 0.001% paid at the time of buying and selling direct equity shares shall continue.
Let’s see how it works in different scenarios:
Assume that, you have purchased 10000 units of Equity @ Rs.10/- on 1st July, 2016.
So, Cost of acquisition= Rs. (10000*10)=Rs.100000 on 01/07/2016
Scenario 1) You sell the entire unit on or before 31st January, 2018 @ Rs. 20/- per unit.
Grandfathered Value = Rs. (10000*20) = Rs.200000
Actual Capital Gain= (200000-100000) = Rs. 100000
But as it is a Long Term Capital Gain, so you don’t have to pay any taxes on it.
If, it was bought on or after Feb 1, 2017, then Short Term Capital Gain tax will be imposed @15%, as the holding period is less than 1 year.
Scenario 2) You will sell the entire unit on 30th April, 2018 @ Rs.31/- per unit
Then, your Value = (10000*31) = Rs.310000
Actual Capital Gain= (310000-100000) = Rs.210000
But your Grandfathered Capital Gain will be = (210000-200000[valuation on 31/01/2018])=Rs.10000.
Your Tax liability= NIL. (As the effective LTCG is below Rs.100000)
Scenario 3) You will sell the entire unit on 30th April, 2018, but @ 45/- per unit.
Then, your Value = (10000*45) = Rs.450000
Actual Capital Gain= (450000-100000) = Rs.350000
But your Grandfathered Capital Gain will be= (350000-200000[valuation on 31/01/2018])= Rs. 150000.
Your Tax liability = (150000*10%) = Rs.15000 (As the effective LTCG is above Rs.100000)
Scenario 4) You will sell the entire unit on 30th April, 2018, but @ 14/- per unit.
Then, your Value = (10000*14) = Rs.140000
Actual Capital Gain= (140000-100000) = Rs.40000
But your Grandfathered Capital Gain will be = (40000-200000[valuation on 31/01/2018]) =Rs. -160000.
Your Tax liability= NIL
But you cannot offset this capital loss with other gains. As the actual scenario shows that, there is a capital gain
Scenario 5) You will sell the entire unit on 30th April, 2018, but @ 8/- per unit.
Then, your Value = (10000*8) = Rs.80000
Actual Capital Gain= (80000-100000) = Rs.-20000
Your Grandfathered Capital Gain will be = No need to calculate.
Your Tax liability= NIL
In this case, actual capital loss can be used to offset other capital gains.
But the most interesting scenario is:
Scenario 6) Suppose unit Price on 31/01/2018= 8/-
You will sell the entire unit on 30th April, 2018, @ 34/- per unit.
Then, your Value = (10000*34) = Rs.340000
Actual Capital Gain= (340000-100000) = Rs.240000
But your Grandfathered Capital Gain will be = Actual Capital Gain [as valuation on 31/01/2018 is less than purchased price]
Your Tax liability = (140000*10%) = Rs.14000 (As the effective LTCG is above Rs.100000)
Also remember, there will be an addition of 4% cess along with your Taxed amount to pay.
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