Long Term Capital Gain Tax on Shares - Equity Shares & Equity Mutual Funds

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Sakshi Shah

Capital Gains
Equity Trading
LTCG
Mutual Fund
STT
Trading Income

Up to FY 2018-19, Long Term Capital Gain (LTCG) on the sale of shares and securities on which Securities Transaction Tax (STT) is paid was exempt under Sec 10(38) of the Income Tax Act. However, under Budget 2018, the exemption under Sec 10(38) was removed. Further, a new Section 112A was introduced to levy 10% income tax on Long Term Capital Gains on the sale of equity shares, equity mutual funds and units of business trust in excess of Rs. 1 lac for a financial year. Sec 112A was applicable to FY 2018-19 (AY 2019-20) onwards.

Capital Gains earned on the sale of Equity Shares and Equity Mutual Funds on which STT is paid is taxable in the following manner:

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Grandfathering Rule

Traders who would have invested into equity markets with a view to earning tax-free income in the form of Long Term Capital Gains would now have to pay tax as per the new rule. The announcement of 10% LTCG was made on 1st February 2018. Thus, an investor who was holding an investment in equity shares and equity mutual funds as on 31/01/2018, should not be required to pay tax on entire capital gains. Hence, to ensure that LTCG earned up to 31st January 2018 should not be taxed, the Capital Gains earned up to 31/01/2018 would be grandfathered using a formula.

For equity shares and equity mutual funds bought on or before 31/01/2018, the cost of acquisition should be calculated as follows:

  1. Lower of Fair Market Value as on 31/01/2018 or the Actual Selling Price
  2. Step 1 or Actual Cost Price whichever is higher
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Section 112A – Calculation of Long Term Capital Gain Tax on Shares

The budget was announced on 01/02/2018 and so the provisions for tax on LTCG are different based on the date of purchase.

Particulars

Up to 31/01/18 01/02/18 Onwards
Date of Purchase Shares bought on or before 31/01/2018 Shares bought on or after 01/02/2018
STCG (sold within 365 days) STCG @ 15% STCG @ 15%
LTCG (sold after 365 days) SP = price at which shares are sold SP = price at which shares are sold
CP = Follow these steps:

Higher of the following:

(i) Price as on 31.01.18 or Actual Selling Price whichever is less

(ii) Actual Cost
CP = price at which shares are bought
LTCG = SP – CP LTCG = SP – CP
Tax = 10% (LTCG – Rs.1,00,000) Tax = 10% (LTCG – Rs.1,00,000)
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Examples for Grandfathering Rule

  Case I Case II
Purchase Date  1st Jan 2018 10th Feb 2018
Purchase Value 2,00,000 2,00,000
Sell Date  10th Jan 2020 10th Jan 2020
Sale Value 3,50,000 3,50,000
Grandfathering rule applicable Yes No
Actual Cost * 2,40,000 ** 2,00,000
LTCG
= Sale Value – Actual Cost
1,10,000 1,50,000
Exempt Exempt up to INR 1 Lakh Exempt up to INR 1 Lakh
Tax Liability 1,10,000 – 1,00,000= 10,000 * 10%
= 1,000
1,50,000 – 1,00,000= 50,000 * 10%
= 5,000

*Note: Actual Cost is the Cost of Acquisition to calculate capital gains 

**Calculation of Actual Cost using FMV (Case I)

  Condition Amount (INR) Qualifying Amount
Step 1 Lower of:

Actual Selling Price
or
FMV on 31st Jan 2018
Lower of:

3,50,000 or 2,40,000  

2,40,000
Step 2 Higher of:

Value in Step 1
or
Purchase Value
Higher of:

2,40,000 or 2,00,000

2,40,000
  Actual Cost   2,40,000

Long Term Capital Gain Tax on Shares – Equity Shares and Equity Mutual Funds

Date of Purchase Date of Sale Tax Treatment
On or before 31/01/2018 On or before 31/01/2018 Exempt u/s 10(38)
On or before 31/01/2018 Between 31/01/2018 and 01/04/2018 Exempt u/s 10(38)
On or before 31/01/2018 01/04/2018 onwards Calculate LTCG as per the above table
* LTCG up to 31/01/2018 exempt
* LTCG after 31/01/2018 – Tax at 10% in excess of Rs. 1 lac
On or after 31/01/2018 01/04/2018 onwards Calculate LTCG as per the above table
Tax at 10% in excess of Rs. 1 lac
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FAQs

Is LTCG taxable now?

Yes. Under Budget 2018, the exemption under Sec 10(38) was removed. Further, a new Section 112A was introduced to levy 10% income tax on Long Term Capital Gains on the sale of equity shares, equity mutual funds and units of business trust in excess of Rs. 1 lac for a financial year. Sec 112A was applicable to FY 2018-19 (AY 2019-20) onwards.

What rate is LTCG taxable at?

LTCG is taxable at a flat 10% on income that is exceeding Rs. 1lk. Therefore, it is exempt up to Rs. 1lk.

Is STCG exempt?

No. Hence, STCG is taxable at a flat rate of 15% without any exemption.

  • Kiran says:

    I have ltcg from shares. Holding since 5 years

    What deduction I can claim under sec 54.

    Inform me various option like deposit gain scheme.

    Thanks

    • Sakshi Shah says:

      To claim exemption from Capital Gains on sale of a Long Term Capital Asset, you can invest into specified securities or units of the specified fund as per Sec 54E, 54EA, 54EB, 54EE. Read more about it here – Capital Gain Exemption

      For further questions, write to us at help@quicko.com

  • Rupesh Mandal says:

    are you sure that Sec 54 instruments can help tax exemption for LTCG Equity sale after holding for more than 1 year? As per my limited knowledge it is only for Long term capital gain on selling of property or land. Please guide.

    • Anushka Shah says:

      Hey Rupesh,
      The Income Tax Act has defined the particular sections under which exemptions can be claimed on capital gains earned. Capital Gain Exemptions are available on sale of long term capital asset other than house property or land as well
      Read more about Capital Gain Exemptions on our Learn Center.

  • Rupesh Mandal says:

    Anushka, I’m afraid, you did not yet clarify my doubt. As far as I know, SEC 54 instruments are only to save Long Term Capital Gain upon selling of Land and Property. I cross-verified with my CA and he also confirmed that SEC 54 instruments can’t help you save tax on LTCG on sale of equity shares and mutual funds. Please correct me if I am wrong.

    • Anushka Shah says:

      Hey Rupesh,
      Your understanding is correct. As per our article on Capital Gain Exemption, you can claim exemption under Sec 54 for capital gains from sale of house property.

      However, exemption under section 54F of the Income Tax Act is available on Capital Gains on sale of any long term capital asset other than house property.

      Read more about Section 54F on our Learn Center.

  • Sachin Rathod says:

    Suppose I invested money in mutual fund on 1/4/2018 & after 3 years I sell it.then do I get 3 lakh ltcg deduction? Or 1 lakh deduction only? If I get only 1 lakh deduction then should I sell mutual fund after every 1 year to get 1 lakh ltcg deduction for each financial year?

    • Anushka Shah says:

      Hey Sachin,
      As per Sec 112A, 10% income tax will be levied on Long Term Capital Gains on the sale of equity shares, equity mutual funds and units of business trust in excess of Rs. 1 lac for a financial year. Hence, you are allowed maximum exemption upto INR 1 lakh on capital gains arising in a single financial year. So to benefit and avail maximum exemption you can split selling your funds every financial year to get INR 1 lakh deduction for each year.

  • Raju says:

    Sir,
    While calculating LTCG under Sec. 112A, in Col. 6 (Total Sale Value) which charges are to be included in / exempted from it ? Also, in Column 12 (Expenditure wholly and exclusively in connection with transfer) what charges are to be included in / exempted from the column ?

    • Anushka Shah says:

      Hey Raju,
      While calculating LTCG under Sec 112A, your Total Sales Value (under Col 6) will purely be Quantity of units sold * Sales value per unit. No charges are to be exempted/ included from/ in it.
      Transfer Expenses (under Col 12) includes expenses incurred on sale of the capital asset. eg: brokerage, clearing charges, transaction charges, turnover fees, GST etc. All the expenses can be claimed except STT

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