Long-term capital gains (LTCG) refer to the gains made on any class of asset held for more than a specified period of time. In India, in case of equity shares and units of equity oriented mutual funds, the specified period is 12 months. In short, in case of shares or units of mutual fund bought and held for more than a year before selling, the gains arising from sale is classified as long term capital gains or LTCG.
What does budget 2018 propose on LTCG for shares/equity oriented mutual fund schemes?
Till now, the tax rate fixed on long term capital gains arising from sale of shares and units of equity oriented mutual fund was zero. In Budget 2018-19, finance minister has proposed a 10% LTCG tax on gains made above Rs 1 lakh per annum on such investments. It is also announced that if the gains exceeded Rupees one lakh in a year, then 10% LTCG tax has to be paid without the benefit of indexation.
However, the investors can exclude gains made till January 31, 2018. This is possible because of grandfathering clause proposed in the announcement.
The proposal is a direct tax proposal on gains from capital assets and hence will be applicable for the assessment year 2019-20 (Financial Year 2018-19). In other words, the LT Capital gains, of over Rs 1 Lakh, made beginning the FY 2018-19 will be liable to tax at 10%, subject to grandfathering clause.
Did tax on LTCG exist earlier?
Tax on LTCG existed till October 2004. The LTCG was replaced by Securities Transaction Tax( STT). This was levied on all trades happening on the stock exchanges. The present rate of STT for various transactions are as mentioned below:
Cash market trades :0.1% of trade value
Derivative segment :0.05% of option premium
:0.01% on futures
It was pointed out in a study conducted in 2016 that the government lost around Rs. 3.5 lakh crore during 2005-12 by replacing LTCG tax with STT. It may, however be noted that no announcement has been made on discontinuing STT while proposing to reintroduce LTCG tax.
How does grandfathering clause affect computation of LTCG tax?
Consider this example. John brought shares of XYZ company from Mumbai stock exchange in December 2016 at Rs. 150, which touched a high of Rs. 200 on January 31, 2018. Now, if he sells the shares at Rs.300 in, say, July 2018, then his taxable gains would be Rs.100 per share. (Rs.300- Rs.200). This is by applying the grandfathering close. Without that clause, his long term capital gain would have been Rs. 150 per share ( Rs. 300- Rs.150).
What is the impact of LTCG tax on investments in Mutual funds?
As per prevailing tax laws, there is no tax on long term capital gains made in the current financial year (2017-18) i.e. sale of funds upto March 31, 2018. But, sales made after 1st April 2018 will be liable to the new LTCG tax. Total capital gain made an investment can be divided into two.
a) Part one is LTCGmade up to 31st Jan 2018.(NAV of the mutual fund on 31st Jan 2018 minus the cost of acquiring the units)
b) Part two is LTCG made between 31st Jan 2018 and actual sale date.(Sale price NAV minus NAV of the scheme as on 31st Jan 2018)
As per the proposed tax law, LTCG tax on part one will be exempted. LTCG tax will be applicable on the gains against part two. This is against the Nil tax that will be in force till 31st March,2018.
Is LTCG tax applicable to all investors?
LTCG tax is applicable to all investors who trade on stock exchanges. As pointed out earlier, STT also will be continued along with LTCG tax. However, foreign portfolio investors (FPIs), who invest in India from places like Mauritius and Singapore, would not be subject to LTCG tax, because of tax avoidance treaties. The position may change based on the revised clauses of double tax avoidance agreements (DTAA) as and when such agreements are renewed.