Budget 2018: Amid rising confusion and rumours flying around on the treatment of long term capital gains on stock market transactions after Finance Minister Arun Jaitley introduced LTCG tax on equities in Union Budget 2018, the government has come out with a 24-point clarificatory note on the subject. Interestingly, the note tilted “Frequently Asked Questions (FAQs) regarding taxation of long-term capital gains proposed in Finance Bill, 2018-reg,” the CBDT (Central Board of Direct Taxes) clarifies wide ranging tax implications on transactions done in the stock market.
The note also provides various different scenarios under which long term capital gains tax will apply on equities. Notably, long term capital gains exceeding Rs 1 lakh will be taxed at the rate of 10% without allowing the benefit of any indexation. However, all gains up to 31st January, 2018 will be grandfathered. The new tax regime is applicable from 1st April 2018. We take a look at a scenario in which investors can make profits of more than 1 lakh, and yet pay nil tax on the same.
Firstly the investors should note the definition of fair market value- “The fair market value means the highest price of such share or unit quoted on a recognized stock exchange on 31st of January, 2018. However, if there is no trading on 31st January, 2018, the fair market value will be the highest price quoted on a date immediately preceding 31st of January, 2018, on which it has been traded.”
Suppose the investor purchases a single share of ABC company on 1st of January, 2017 at Rs 100, its fair market value is Rs 200 on 31st of January, 2018 and it is sold on 1st of April, 2018 at Rs 150. In this case, the actual cost of acquisition (ie. Rs 100 as on 1st January 2017) is less than the fair market value as on 31st of January, 2018 (ie. Rs 200). However, the sale value as on 1st April 2018 (ie Rs 150) is also less than the fair market value as on 31st of January, 2018.Accordingly, the sale value of Rs 150 will be taken as the cost of acquisition and the long-term capital gain will be NIL (Rs 150 – Rs 150).
In such a scenario, the investors can make a moolah, and as long their selling price as after April 1, 2018 remains lower than the highest price as on January 31st 2018, their gains will remain tax free, provided that the shares were purchased one year prior to the date of sale. It is to be noted that short term capital gains tax will continue to apply for shares sold within 1 year, at the applicable rate of 15%.