Up to FY 2018-19, Long Term Capital Gains (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:
- Short Term Capital Gains
If the equity shares and equity MFs are sold before one year from its purchase, Capital Gains on such sale is called Short Term Capital Gain. STCG is taxable at 15% under Sec 111A. STCL can be set off against both LTCG and STCG. Remaining STCL can be carried forward for 8 years. Budget 2018 did not announce any changes to STCG.
- Long Term Capital Gains
If the equity shares and equity MFs are sold after one year from its purchase, then the Capital Gains on such sale is called Long Term Capital Gain. LTCL can be set off against LTCL only. And then the remaining LTCL can be carried forward for 8 years. Budget 2018 announced changes in the tax treatment of LTCG.
- LTCG up to FY 2018-19 – Exempt under Sec 10(38)
- LTCG FY 2018-19 onwards – Tax at 10% (without indexation) in excess of Rs. 1 lac
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 upto 31st January 2018 should not be taxed, the Capital Gains earned upto 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 on 31/03/2018 or the Actual Selling Price
- Step 1 or Actual Cost Price whichever is higher
Section 112A – Calculation of LTCG 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.
|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|
|Sell Date||10th Jan 2020||10th Jan 2020|
|Grandfathering rule applicable||Yes||No|
|Actual Cost *||2,40,000 **||2,00,000|
= Sale Value – Actual Cost
|Exempt||Exempt up to INR 1 Lakh||Exempt up to INR 1 Lakh|
|Tax Liability||1,10,000 – 1,00,000= 10,000 * 10%
|1,50,000 – 1,00,000= 50,000 * 10%
*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
FMV on 31st Jan 2018
3,50,000 or 2,40,000
|Step 2||Higher of:
Value in Step 1
2,40,000 or 2,00,000
LTCG 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
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.
LTCG is taxable at a flat 10% on income that is exceeding Rs. 1lk. Therefore, it is exempt up to Rs. 1lk.
No. Hence, STCG is taxable at a flat rate of 15% without any exemption.