Confused About Tax on LTCG? All Your Questions Answered Here

The Ministry of Finance answers 24 key questions on the proposed Long-Term Capital Gains Tax effective 1 April 2018.

Image used for representational purposes.

(Photo: The Quint) 

Finance Minister Arun Jaitley in his Budget speech on Thursday, 1 February proposed to tax long-term capital gains (LTCG) on equities exceeding Rs 1 lakh at 10 percent, in order to address a significant erosion in the tax base, and rake in revenue of Rs 20,000 crore subsequently.

So far, LTCG or gains from the transfer of long-term capital assets like equity shares of a company, a unit of equity-oriented fund or a unit of business trust was exempt from income tax under clause (38) of section 10 of the Income-tax Act, although transactions in such long-term capital assets are liable to securities transaction tax (STT).

The existing regime is inherently biased against manufacturing and has encouraged diversion of investment to financial assets, on grounds of which the govt proposed to withdraw the exemption and introduce a new section 112A in the Act vide clause 31 of the Finance Bill, 2018 so as to provide that long-term capital gains exceeding one lakh rupees will be taxed at a concessional rate of 10 percent.

If you’re confused about the new proposition and how LTCG will affect you, here’s a detailed list of FAQs released by Pravin Rawal, Director of the Central Board of Direct Taxes:

1. What is the meaning of long-term capital gains under the new tax regime for LTCG?

Long term capital gains mean gains arising from the transfer of long-term capital assets. The Finance Bill, 2018 proposes to provide for a new long-term capital gains tax regime for the following assets –

i. Equity Shares in a company listed on a recognised stock exchange;

ii. Unit of an equity oriented fund; and

iii. Unit of a business trust.

The proposed regime applies to the above assets, if:

a. the assets are held for a minimum period of twelve months from the date of acquisition; and

b. the Securities Transaction Tax (STT) is paid at the time of transfer. However, in the case of equity shares acquired after 1.10.2004, STT is required to be paid even at the time of acquisition (subject to notified exemptions).

2. What are the modes of acquisition of equity shares which are proposed to be exempted from the condition of payment of STT?

The Central Government had exempted certain modes of acquisition of equity shares for the purposes of clause (38) of section 10 of the Act vide notification no. 43/2017 dated 5 June 2017. This notification is proposed to be reiterated for the purposes of clause 31 of the Finance Bill, 2018 after its enactment.

3. What is the point of chargeability of the tax?

The tax will be levied only upon transfer of the long-term capital asset on or after 1 April 2018, as defined in clause (47) of section 2 of the Act.

4. What is the method for calculation of long-term capital gains?

The long-term capital gains will be computed by deducting the cost of acquisition from the full value of consideration on transfer of the long-term capital asset.

5. How do we determine the cost of acquisition for assets acquired on or before 31 January 2018?

The cost of acquisition for the long-term capital assets acquired on or before 31 January 2018 will be the actual cost. However, if the actual cost is less than the fair market value of such asset as on 31 January 2018, the fair market value will be deemed to be the cost of acquisition. Further, if the full value of consideration on transfer is less than the fair market value, then such full value of consideration or the actual cost, whichever is higher, will be deemed to be the cost of acquisition.

6. How will the fair market value be determined?

In case of a listed equity share or unit, the fair market value means the highest price of such share or unit quoted on a recognised stock exchange on 31 January 2018. However, if there is no trading as of 31 January 2018, the fair market value will be the highest price quoted on a date immediately preceding 31 January, on which it has been traded. In the case of unlisted units, the net asset value of such unit on 31 January 2018 will be the fair market value.

7. Please provide illustrations for computing long-term capital gains in different scenarios, in the light of answers to questions 5 and 6.

The computation of long-term capital gains in different scenarios is illustrated as  under :

Scenario 1 – An equity share is acquired 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 250. As the actual cost of acquisition is less than the fair market value as on 31 January 2018, the fair market value of Rs 200 will be taken as the cost of acquisition and the long-term capital gain will be Rs 50 (Rs 250 – Rs 200).

Scenario 2 – An equity share is acquired 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 is less than the fair market value as on 31st of January, 2018. However, the sale value 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).

Scenario 3 – An equity share is acquired on 1st of January, 2017 at Rs 100, its fair market value is Rs 50 on 31st of January, 2018 and it is sold on 1st of April, 2018 at Rs 150. In this case, the fair market value as on 31st of January, 2018 is less than the actual cost of acquisition, and therefore, the actual cost of Rs 100 will be taken as actual cost of acquisition and the long-term capital gain will be Rs 50 (Rs 150 – Rs 100).

Scenario 4 – An equity share is acquired 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 50. In this case, the actual cost of acquisition is less than the fair market value as on 31 January, 2018. The sale value is less than the fair market value as on 31st of January, 2018 and also the actual cost of acquisition. Therefore, the actual cost of Rs 100 will be taken as the cost of acquisition in this case. Hence, the long-term capital loss will be Rs 50 (Rs 50 – Rs 100) in this case.

8. Whether the cost of acquisition will be inflation indexed?

Sub-clause (5) of clause 31 of the Finance Bill, 2018, inter alia, provides that the long-term capital gain will be computed without giving effect to the provisions of the second provisos of section 48. Accordingly, it is clarified that the benefit of inflation indexation of the cost of acquisition would not be available for computing long-term capital gains under the new tax regime.

9. What is the date of commencement of the proposed new tax regime?

The proposed new tax regime will apply to transfer made on or after 1 April, 2018. The existing regime providing exemption under clause (38) of section 10 of the Act will continue to be available for transfer made on or before 31 March 2018.

10. What will be the tax treatment of accrued gains upto 31 January 2018?

As the fair market value on 31 January 2018 will be taken as cost of acquisition (except in some typical situations explained under Question 7), the gains accrued up to 31 January 2018 will continue to be exempt.

11. What will be the tax treatment of transfer of share or unit between 1 February 2018 to 31 March 2018?

As replied in answer 9, the new tax regime will be applicable to transfer made on or after 1 April 2018, the transfer made between 1 February 2018 and 31 March 2018 will be eligible for exemption under clause (38) of section 10 of the Act.

12. What will be the tax treatment of transfer made on or after 1 April 2018?

The long-term capital gains exceeding Rs 1 Lakh arising from transfer of these asset made on after 1 April, 2018 will be taxed at 10 percent. However, there will be no tax on gains accrued up to 31 January 2018 as explained in Question 10.

13. What is the date from which the holding period will be counted?

The holding period will be counted from the date of acquisition.

14. Whether tax will be deducted at source in case of gains by resident tax payer?

No. There will be no deduction of tax at source from the payment of long-term capital gains to a resident tax payer.

15. Whether tax will be deducted at source in case of payment of long-term capital gains by non-resident tax payer (other than a Foreign Institutional Investor)?

Ordinarily, under section 195 of the Act, tax is required to be deducted on payments made to non-residents, at the rates prescribed in Part-II of the First Schedule to the Finance Act. The rate of deduction in the case of capital gains is also provided therein. In terms of the said provisions, tax at the rate of 10 percent will be deducted from payment of long-term capital gains to a non-resident tax payer (other than a Foreign Institutional Investor). The capital gains will be required to be computed in accordance with clause 31 of the Finance Bill, 2018.

16. Whether tax will be deducted at source in case of payment of long-term capital gains by Foreign Institutional Investors (FIIs)?

No. There will be no deduction of tax at source from payment of long-term capital gains to a Foreign Institutional Investor in view of the provisions of sub-section (2) of section 196D of the Act.

17. How will the gains in the case of FIIs be determined?

The long-term capital gains in case of FIIs will be determined in the same manner as explained in earlier answers in the case of resident tax payers.

18. What will be the treatment of the gains accrued upto 31 January 2018 in the case of FIIs?

In case of FIIs also, there will be no tax on gains accrued upto 31 January 2018 as explained in Question 10.

Q 19. What will be the tax treatment of transfer of share or unit between 1 February 2018 to 31 March 2018 in the case of FIIs?

As explained in Question 11, in case of FIIs also, the transfer made between 1 February 2018 and 31 March 2018 will be eligible for exemption under clause (38) of section 10 of the Act.

20. What will be the tax treatment of transfer made on or after 1 April 2018 in case of FIIs?

As explained in Question 12, in case of FIIs also, the long-term capital gains exceeding Rs 1 Lakh arising from transfer of these assets made on or after 1 April 2018 will be taxed at 10 percent. However, there will be no tax on gains accrued up to 31 January 2018 as explained in Question 10.

21. What will be the cost of acquisition in the case of bonus shares acquired before 1 February 2018?

The cost of acquisition of bonus shares acquired before 31 January 2018 will be determined as per sub-clause (6) of clause 31 of the Finance Bill, 2018. Therefore, the fair market value of the bonus shares as on 31 January 2018 will be taken as cost of acquisition (except in some typical situations explained in Question 7), and hence, the gains accrued up to 31 January 2018 will continue to be exempt.

22. What will be the cost of acquisition in the case of right share acquired before 1 February 2018?

The cost of acquisition of right share acquired before 31 January 2018 will be determined as per sub-clause (6) of clause 31 of the Finance Bill, 2018. Therefore, the fair market value of right share as on 31 January 2018 will be taken as cost of acquisition (except in some typical situations explained in Question 7), and hence, the gains accrued up to 31 January 2018 will continue to be exempt.

23. What will be the treatment of long-term capital loss arising from transfer made between 1 February 2018 and 31 March 2018?

As the exemption from long-term capital gains under clause (38) of section 10 will be available for transfer made between 1 February 2018 and 31 March 2018, the long-term capital loss arising during this period will not be allowed to be set off or carried forward.

24. What will be the treatment of long-term capital loss arising from transfer made on or after 1 April 2018?

Long-term capital loss arising from transfer made on or after 1April 2018 will be allowed to be set-off and carried forward in accordance with existing provisions of the Act. Therefore, it can be set-off against any other long-term capital gains and unabsorbed loss can be carried forward to subsequent eight years for set-off against long-term capital gains.