Budget 2018 capital gains tax: How your equity funds, shares will be taxed now

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Updated: February 4, 2018 12:27:14 PM

Budget 2018: Finance Minister Arun Jaitley has brought back the Long Term Capital Gains tax on equities and equity funds by the way of insertion of Section 112A under the I-T Act,1961. Here's how it will impact you.

 How your equity funds, shares will be taxed nowBudget 2018: LTCG out of the sale of equity-oriented mutual fund schemes and equity shares will now be taxed at the rate of 10% without any benefit of indexation.

Budget 2018: Having recognized the fact that a vibrant equity market is essential for the economic growth of a country, Finance Minister Arun Jaitley has proposed a change in the present capital gains tax regime in the Budget 2018. Making his Budget speech, he announced the comeback of Long Term Capital Gains (LTCG) tax by the way of insertion of Section 112A under the Income-Tax Act, 1961.

As per this provision, “LTCG out of the sale of equity-oriented mutual fund schemes and equity shares will now be taxed at the rate of 10% without any benefit of indexation, if the capital gain exceeds Rs 1 lakh in a year. Further, no change in the period of holding to qualify for long-term has been done. However, if the amount of gain is less than Rs 1 lakh in a financial year, then this provision is not for you,” says CA Abhishek Soni, Founder, tax2win.in.

How  Long Term Capital Gains are taxed

At present, the LTCG tax arising out from the sale of equity mutual funds and equity shares is nil, if you have held such units or shares for at least one year. “Now with the insertion of provision under Section 112A, the LTCG tax exemption on transaction of sale of listed equity shares and units of equity-oriented funds undertaken on a stock exchange and subject to STT stands withdrawn,” says Soni.

In 2004, the Capital Gains Tax was abolished and was replaced by the Securities Transaction Tax. However, with insertion of the new provision now, from 1st April 2018, both STT and Capital Gains Tax would levy on the gain in excess of Rs 1,00,000.

Short-term Relief

Interestingly, a relief has been provided in this proposal, i.e. the current exemption on the LTCG tax would continue on appreciation in value until 31 January 2018. Only the gains that would arise after 31 January 2018 would be taxable. Now let’s understand the provision with the help of an example:

Example

If an equity share was purchased, say, on 1st April, 2017 for Rs 1,00,000 and the highest price quoted as on 31st January, 2018 in respect of this share is Rs 1,20,000, then as per the existing provisions on LTCG, there will be no tax on the gain of Rs 20,000. Now as per the new provision, if this share is sold after qualifying long term, then any gain in excess of Rs 20,000 earned after 31st January, 2018 will be taxed @ 10%.

However, if you sale the portfolio before March 31, 2018, then you are eligible for exemption as per section 10(38), i.e. the newly-introduced section 112A will be applicable from 1.4.2018.

Example 1

ParticularsPre BudgetPost Budget
Date of Purchase01-Feb-1601-Feb-16
Date of Sale31-Mar-201831-Mar-2018
Purchase Price100000100000
Sale Price140000140000
FMV on 31 January 2018120000120000
No. of Units11
Computation of taxes on LTCG  
Sale consideration140000140000
Less: cost of acquisition considered100000100000
Capital Gains/(Loss)4000040000
Exemption4000040000

Note for Eg 1: Since the new provision shall apply from 1st April 2018 so if shares are sold on or before 31st March 2018 then FMV is to be ignored.

Example 2

ParticularsPre BudgetPost Budget
Date of Purchase01-Feb-1601-Feb-16
Date of Sale1-Apr-20181-Apr-2018
Purchase Price100000100000
Sale Price140000140000
FMV on 31 January 2018120000120000
No. of Units11
Computation of taxes on LTCG  
Sale consideration140000140000
Less: cost of acquisition considered100000120000
Capital Gains/(Loss)4000020000
Exemption40000
Net Capital Gain20000
Tax at 10%Since it is below Rs. 1 lakh, no tax will be there.

Example 3

ParticularsPre BudgetPost Budget
Date of Purchase01-Feb-1601-Feb-16
Date of Sale1-Apr-20181-Apr-2018
Purchase Price10000001000000
Sale Price14000001400000
FMV on 31 January 201812000001200000
No. of Units11
Computation of taxes on LTCG  
Sale consideration14000001400000
Less: cost of acquisition considered10000001200000
Capital Gains/(Loss)400000200000
Exemption400000
Net Capital Gain200000
Tax at 10%10000 [Tax will be levied at 10% on LTCG exceding Rs.1 lakh]

“We believe that the after effects of this provision could be that an investor instead of waiting for a year and paying 10% LTCG tax may get more inclined to pay Short Term Capital Gains tax at 15% so that his funds get free frequently and he could re-enter the market. Thus, the levy of LTCG tax on equities at the rate of 10% is a negative surprise, but the relief of purchases up to Jan 31, 2018 would mitigate the adverse impact to an extent,” informs Soni.

Short and long term capital gain tax on various investments
Instrument
Short TermLong Term
DurationTaxDurationTax
Property< 2 YearAt applicable Slab Rate> 2 Year20% (with indexation benefit)
Gold< 3 YearAt applicable Slab Rate> 3 Year20% (with indexation benefit)
Sovereign Gold Bond< 3 YearAt applicable Slab Rate> 3 Year20% (with indexation benefit)
* On redemption: No Tax
Shares< 1 Year15%> 1 Year10% -Above 1 lakh -(No Indexation Benefit)
Equity Mutual Fund< 1 Year15%> 1 Year10% – Above 1 lakh -(No Indexation Benefit)
Debt Mutual Fund< 3 YearAt applicable Slab Rate> 3 Year20% (with indexation benefit)
Corporate listed Bond< 1 YearAt applicable Slab Rate> 1 year10% (No Indexation Benefit)
*Tax rate excludes cess and surcharge, if any
Data as on 1 Feb 2018

(Source: Bankbazaar.com)

Markets to become more volatile

Tax experts say that this new provision would also increase volatility in the stock markets. “The FM has re-introduced LTCG in the Budget 2018 in view of the fact that return on equity investment is already quite attractive (as told by the FM in Budget Speech). However, with this new provision, volatility in the market cannot be ruled out as investors would prefer to sell their equities whenever there is an opportunity to earn handsome returns in the short term, rather than holding those equities for more than a year and ending up paying 10% LTCG. They would happily pay 15% tax on Short-Term Capital Gains,” says CA Anurag Sodhani, consultant, Big4.

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