The Long Term Capital Gain Tax on Shares and Equity oriented Mutual Funds were exempt since 2004. The government has introduce Securities Transaction Tax from 2004, to simply the tax regime, and introduce section 10(38) to provide exemption to long term capital gains on transfer of shares listed on a recognised stock exchange (BSE & NSE) provided STT was paid on them. Short term capital gains on such a transfer would be taxed @ 15%. The Budget 2018 has proposed to tax Long Term Gains on Equity Shares and Mutual Funds without withdraw of securities transaction tax (STT), which was introduced as an alternative to LTCG tax.

Few important points to be considered

1) The exemption of LTCG will continue till 31 March 2018. LTCG Tax of 10% will be applicable from 1 April 2018. A new section 112A is introduced into the Income-tax Act, 1961 to tax the long term capital gains on the listed shares and units of equity oriented mutual funds transferred on or after 1st April, 2018.

2) There is grandfathering provision for shares already held by an investor as on 31st January, 2018, special are put in place, which means cost of acquisition of  shares will be price at 31 Jan 2018 or actual cost which is higher. However shares bought after 31 Jan 2018 there is no grandfathering available

4) There is No indexation benefit. Actual Cost need to be taken and none of the deductions under Chapter VI-A of the Act (eg 80C, 80D, 80G etc) will also not be available for being reduced from this long term capital gain

5) up to Rs 100,000/- of LTCG will not be taxed. The government has kept small investors out of the ambit of the levy by stipulating that the proposed 10% tax will apply only to LTCG exceeding the threshold of 1 lakh.

6) Exemption in Section 54EC by investing in bonds issued by NHAI, REC etc will not be available as an amendment is proposed to section 54EC also whereby this section would apply only to long term capital gains on transfer of land or building or both.

7) There is special formula to calculate cost of buying shares which is Cost will be higher of

 a) Actual Cost of Buying Shares

And

b) Fair Market Value of Shares as on 31 January 2018 or Selling price of Shares whichever is lower.

For this purpose, “fair market value” means,—

(i) in a case where the capital asset is listed on any recognised stock exchange, the highest price of the capital asset quoted on such exchange on the 31st day of January, 2018:

Provided that where there is no trading in such asset on such exchange on 31st day of January, 2018, the highest price of such asset on such exchange on a date immediately preceding the 31st day of January, 2018 when such asset was traded on such exchange shall be the fair market value

(ii) in a case where the capital asset is a unit and is not listed on a recognised stock exchange, the net asset value of such asset as on the 31st day of January, 2018

Let us understand this with Example

LTCG calculation from April 2018

Case 1

Case 2

Case 3

Case 4

Case 5

Case 6

Purchase Price Share  (a)

Rs 100

Rs 100

Rs 100

Rs 100

Rs 100

Rs 100

Purchase date

31 Jan 2017

31 Jan 2017

31 Jan 2017

31 Jan 2017

31 Jan 2017

31 May 2017

No of Shares

100

1000

10000

1

1

1

Fair Market Value on 31 Jan 2018                       (b)

120

120

120

150

120

150

Sale Date

After 31 Jan 2018  before 31 Mar 2018

After 1 April 2018

After 1 April 2018

After 1 April 2018

After 1 April 2018

15 April 2018

Actual Sale Price          (c)

200

200

200

120

80

200

Cost - Higher of (a) & Lower of (b) or (c)

NA

120

120

120

100

NA

Capital Gains

Rs 8,000 LTCG, Exempt in 10(38)

Rs 80,000 LTCG

10% LTCG on Gain over 1 Lac

NIL

Loss of Rs 20

STCG Rs 100

Taxability

Not Taxable as Sale before 31 March 2018

No Tax as Gains is less than 1 Lacs

Rs 70,000 LTCG Tax on 7 Lac

NA

Carry Forward Rs 20

Rs 15 STCG Tax

Budget Memorandum

New regime for taxation of long-term capital gains on sale of equity shares etc.

Under the existing regime, long term capital gains arising from transfer of long term capital assets, being equity shares of a company or an unit of equity oriented fund or an unit of business trusts , is exempt from income-tax under clause (38) of section 10 of the Act. However, transactions in such long term capital assets carried out on a recognized stock exchange are liable to securities transaction tax (STT). Consequently, this regime is inherently biased against manufacturing and has encouraged diversion of investment in financial assets. It has also led to significant erosion in the tax base resulting in revenue loss. The problem has been further compounded by abusive use of tax arbitrage opportunities created by these exemptions.

In order to minimize economic distortions and curb erosion of tax base, it is proposed to withdraw the exemption under clause (38) of section 10 and to introduce a new section 112A in the Act to provide that long term capital gains arising from transfer of a long term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust shall be taxed at 10 per cent. of such capital gains exceeding one lakh rupees .

This concessional rate of 10 per cent will be applicable to such long term capital gains, if—

i) in a case where long term capital asset is in the nature of an equity share in a company , securities transaction tax has been paid on both acquisition and transfer of such capital asset; and

ii) in a case where long term capital asset is in the nature of a unit of an equity oriented fund or a unit of a business trust, securities transaction tax has been paid on transfer of such capital asset.

Further, sub-section (4) of the new section 112A empowers the Central Government to specify by notification the nature of acquisitions in respect of which the requirement of payment of securities transaction tax shall not apply in the case of equity share in a company. Similarly, the requirement of payment of STT at the time of transfer of long term capital asset, being a unit of equity oriented fund or a unit of business trust, shall not apply if the transfer is undertaken on recognized stock exchange located in any International Financial Services Centre( IFSC) and the consideration of such transfer is received or receivable in foreign currency.

Further, the new provision of section 112A also proposes to provide the following:—

i) The long term capital gains will be computed without giving effect to the first and second provisos to section 48, i.e. inflation indexation in respect of cost of acquisitions and cost of improvement, if any, and the benefit of computation of capital gains in foreign currency in the case of a non-resident, will not be allowed.

ii) The cost of acquisitions in respect of the long term capital asset acquired by the assessee before the 1st day of February, 2018, shall be deemed to be the higher of –

a) the actual cost of acquisition of such asset; and

b) the lower of –

(I) the fair market value of such asset; and

(II) the full value of consideration received or accruing as a result of the transfer of the capital asset.

iii) “equity oriented fund” has been defined to mean a fund set up under a scheme of a mutual fund specified under clause

(23D) of section 10 and,—

a) In a case where the fund invests in the units of another fund which is traded on a recognized stock exchange,-

(I) A minimum of 90 per cent. of the total proceeds of such funds is invested in the units of such other fund ; and

(II) such other fund also invests a minimum of 90 per cent. of its total proceeds in the equity shares of domestic companies listed on recognized stock exchange; and

b) in any other case, a minimum of 65 per cent. of the total proceeds of such fund is invested in the equity shares of domestic companies listed on recognized stock exchange.

iv) Fair market value has been defined to mean –

a) in a case where the capital asset is listed on any recognized stock exchange, the highest price of the capital asset quoted on such exchange on the 31st day of January, 2018. However, where there is no trading in such asset on such exchange on the 31st day of January, 2018 , the highest price of such asset on such exchange on a date immediately preceding the 31st day of January, 2018 when such asset was traded on such exchange shall be the fair market value; and

b) in a case where the capital asset is a unit and is not listed on recognized stock exchange, the net asset value of such asset as on the the 31st day of January, 2018.

v) The benefit of deduction under chapter VIA shall be allowed from the gross total income as reduced by such capital gains.

Similarly, the rebate under section 87A shall be allowed from the income tax on the total income as reduced by tax payable on such capital gains.

These amendments will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year 2019-20 and subsequent assessment years. [Clause 5 & 31]

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    I hope by reading this article you got enlighten on ,How to calculate Long Term Capital Gain Tax on Equity Shares and Mutual Fund from 1st April 2018rebate under section 80DDB, further to mention before taken any financial decision based on this content it is prefered to take an expert opinion as matter can be subjective.