Income Tax on Equity Share Trading can be treated as Long Term Capital Gains or Short Term Capital Gains based on the period of holding. Up to FY 2018-19, LTCG i.e. Long Term Capital Gain on 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 Section 10(38) was removed. Further, a new Section 112A of Income Tax Act was introduced to levy a 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. Section 112A was applicable from FY 2018-19 (AY 2019-20) onwards.
What is Long Term Capital Gain?
The profit or loss on the sale of a capital asset held for more than the specified holding period is a Long Term Capital Gain (LTCG) or Long Term Capital Loss (LTCL).
Based on the period of holding, here is a summary of Capital Gain on the sale of Capital Assets. Eg: If the listed equity share of a domestic company is sold after 12 months of purchase, the profit or loss is Long Term Capital Gain or Long Term Capital Loss on shares.
| Capital Asset | Period of Holding |
| Equity Shares of Domestic Company listed on a recognized stock exchange | 12 months |
| Equity Shares of Domestic Company not listed on a recognized stock exchange | 24 months |
| Equity Shares of Foreign Company whether listed or not | 24 months |
| Equity-Oriented Mutual Funds or ETFs (Exchange Traded Funds) | 12 months |
| Debt-Oriented Mutual Funds or ETFs (Exchange Traded Funds) | 36 months |
| Debentures or Bonds listed on a recognized stock exchange | 12 months |
| Debentures or Bonds not listed on a recognized stock exchange | 36 months |
| Immovable Property such as land, building, or house property | 24 months |
| Movable Property such as jewelry, car, painting, work of art | 36 months |
Section 112A Grandfathering Rule to calculate Long Term Capital Gain on Shares
Traders who would have invested in 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 of 31/01/2018, should not be required to pay tax on entire capital gains. Hence, to ensure that LTCG on shares 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:
- Lower of Fair Market Value as of 31st January 2018 or the Actual Selling Price
- Step 1 or Actual Cost Price whichever is higher
Section 112A of Income Tax Act – 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 on shares 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) |
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 |
Income Tax on Long Term Capital Gain
The tax rate of a capital asset is determined on the basis of the nature of capital gain i.e. LTCG or STCG.
| Capital Asset | STT | LTCG | STCG |
| Listed equity share of a domestic company | Yes | 10% in excess of INR 1 lac u/s 112A | 15% u/s 111A |
| Listed equity share of a domestic company | No | 10% without indexation | slab rate |
| Unlisted equity share of a domestic company | No | 20% with indexation | slab rate |
| Listed equity share of a foreign company | Yes / No | 10% without indexation | slab rate |
| Unlisted equity share of a foreign company | Yes / No | 20% with indexation | slab rate |
| Equity Mutual Fund or ETF (Exchange Traded Fund) | Yes | 10% in excess of INR 1 lac u/s 112A | 15% u/s 111A |
| Debt Mutual Fund or ETF | No | 20% with indexation | slab rate |
| Listed Debentures or Bonds | No | 10% without indexation | slab rate |
| Unlisted Debentures or Bonds | No | 20% without indexation | slab rate |
| Land, Building, House Property, Car, Jewellery, Paintings, Art of Work | NA | 20% with indexation | slab rate |
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 |
LTCG on Shares – Reporting under Schedule 112A of ITR
The ITR Form under which the taxpayer needs to report income from capital gains includes ITR-2 and ITR-3. AY 2020-21 onwards, the ITR Forms comprised of reporting LTCG on shares and mutual funds under Schedule 112A. Under Schedule 112A of ITR, the taxpayer needs to provide scripwise reporting of long term capital gains on equity shares and equity mutual funds purchased on or before 1st February 2018. To calculate the LTCG as per Section 112A after considering the provisions of the grandfathering rule, reporting Schedule 112A is mandatory. The taxpayer needs to report the following details in ITR:
- ISIN i.e. International Securities Identification Number
- Name of the share or unit
- Number of shares
- Sales price per share or unit
- Cost of Acquisition
- FMV i.e. Fair Market Value as on 31/01/2018
- Expenditure related to transfer
Set Off & Carry Forward LTCL under Section 112A of Income Tax Act
The loss on sale of listed equity shares and mutual funds held for more than 12 months is a Long Term Capital loss. A taxpayer can set off LTCL from one capital asset against LTCG from another capital asset. As per the income tax rules for set off and carry forward of losses, LTCL i.e. Long Term Capital Loss can be set off against Long Term Capital Gains only in the current year. The taxpayer can carry forward the remaining loss for 8 years and set off against future LTCG only.
If the taxpayer has income from sale of some listed equity shares and securities, and profit from other listed equity shares and securities, only net gains in excess of INR 1 lac are taxable at 10%. Further, the net LTCL under Section 112A of income tax act can be set off against LTCG on sale of shares, securities, property, jewellery, car or any other capital asset. The remaining loss can be carried forward for 8 years.
Exemption from LTCG on Shares
The taxpayer having income from the sale of a long term capital asset can claim capital gain exemption under Section 54 to 54GB of the Income Tax Act if he/she fulfills the conditions.
A taxpayer can claim the exemption by reinvesting the proceeds from the sale into a specified capital asset. Such exemption would lower the capital gains and save taxes on the same. However, the taxpayer must hold the new asset for the specified period as per the relevant section. However, if he/she sells the asset before the specified time period, he/she must report it as an income in the relevant financial year and pay tax at the applicable rate.
The taxpayer has an option to open an account under the Capital Gains Account Scheme and park the sale proceeds in it till the time they invest in the specified asset to claim the Capital Gains exemption.
FAQs
Yes. Under Budget 2018, the exemption under Sec 10(38) was removed. Further, a new Section 112A of Income Tax Act was introduced to levy a 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.
Grandfathering rule is used to determine the cost of acquisition to calculate the long term capital gain tax on shares and securities that are listed and on which STT is paid.
To calculate the LTCG on the sale of equity shares and equity mutual funds bought on or before 31/01/2018, the cost of acquisition is lower of FMV as of 31/01/2018 or the actual selling price and higher of the earlier result and actual cost price.
FMV i.e. Fair Market Value is the highest price of an equity share or equity mutual fund quoted on a recognised stock exchange as on 31st January 2018. If the said share or mutual fund was not traded on 31st Jan 2018, FMV would be the highest price on the immediately preceding trading day. FMV of Equity Shares is available on the NSE website. Further, the FMV of Equity Mutual Funds is available on the AMFI website.
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