Long-Term Capital Gain Tax- Simplified [Budget 2018-19]

Long-term capital gain tax- Simplified [Budget 2018-19]:

For the last couple of days, I was on a long family vacation for my birthday which is on 2nd February. I received a number of gifts. However, there are few major ones that are worth discussing here.

First, just a day before my bday (1st Feb), I got a huge gift from our finance minister Mr Arun Jaitely. It was the re-introduction of the long-term capital gain (LTCG) tax @10% after 14 long years through the union budget 2018-19.

Second, on my bday (2nd Feb), the market gave another amazing gift. The Sensex declined by over 800 points due to the announcement of LTCG tax. It was the first big dip of the year after an immense bull rally in January’18.

Overall, my birthday turned out to be quite happening with lots of news to discuss.

Nevertheless, enough talk about me. Now, let’s discuss one of the biggest topic which every Indian investor is talking right now- the Long-term capital gain tax on equity. And how to calculate it?

Long-term capital Gain tax:

As you all might already know that the long-term capital gain tax is now applicable in Indian stock market, which means that even if you sell the stock after holding it for over 1 year, you have to pay tax for the capital gains.

Earlier, the LTCG tax was NIL. Investors need not pay any tax on the capital gains if they hold the share for more than 1 years.

Here are few of the top points that you need to know regarding the Long-term capital gain tax discussed in the union budget 2018-19:

  • Up to Rs 1 lakhs, the long-term capital gain is exempted from taxation.
  • The LTCG tax on the sale of shares listed on the stock exchange after long-term holding is taxable at 10% of the capital gain (exceeding Rs 1 lakh).
  • The long-term capital gain tax will be applicable only when you sell the long-term capital asset on/after 1st April 2018. All the equity assets sold before 1st April 2018 will be exempted from the long-term capital gain tax.

In the budget 2018 speech, the FM stated that any notational long-term gains until January 31st, 2018 will be grandfathered (exempted from taxation).

‘Grandfather’ simply means ‘exempted from tax’.

However, according to the newly released Frequently Asked Questions (FAQs) regarding taxation of long-term capital gains proposed in finance bill, the long-term capital gain tax will be applicable on the shares sold only on or after 1st April 2018.

This means that even if you sell the stock between 1st Feb’2018 to 1st April’2018, you won’t have to pay any tax on the long-term capital gains.

Source: http://www.incometaxindia.gov.in/Lists/Latest%20News/Attachments/216/FAQ-on-LTCG.pdf

Further, the new cost of holding of shares i.e. purchase price can be (in general) considered as the highest price on January 31st, 2018. This clause has been introduced in order to safeguard the capital gains of the past loyal long-term investors in the Indian market.

In short, this means that you do not need to worry about the huge long-term capital gain tax if you have bought a stock 10 years back at a very cheap price. Your cost of acquisition will not be considered same as the purchase price (10 years back) while calculating the long-term capital gains.  The gains will be calculated only after 31st January 2018.

For example, let’s say you bought a stock XYZ 10 years back at Rs 15. On January 31st, 2018 its price was Rs 1000. Then this capital gain of Rs 1000- Rs 15 = Rs 985 is exempted from the LTCG tax. Further, if you sell this stock after 1st April 2018 at Rs 1080, then the capital gain will be considered only as Rs 1080- Rs 1000= Rs 80. Rest gain is ‘Grandfathered’.

In addition, do not forget the tax exemption on Rs 1 lakh on the long-term capital gain that every long-term investor is getting.

Also read: Different Charges on Share Trading Explained- Brokerage, STT & More

Calculation of long-term capital gain:

The calculation of the long-term capital gain depends on new acquisition cost (i.e. revised purchase price) for the shares.

This calculation of the acquisition cost for the purpose of the computing the capital gains requires three prices- actual purchase price, highest trading price as on 31st Jan 2018 and the actual selling price.

The acquisition cost will be the higher of the actual purchase price or the lower of maximum traded price on Jan 31st, 2018 and actual selling price.

Sounds complicated? Right? But, it isn’t.

Let’s understand this with an example.

Assume that you bought a stock at Rs 100. The highest trading price of that stock on 31st January 2018 is Rs 200. And the actual selling price (after 1st April 2018) for long-term holding is Rs 150.

Here, the cost of acquisition is higher of:

A. Actual cost (Rs 100)
B. Lower of

  1. Highest price on Jan 31st Jan 2018 (200)
  2. Actual selling price (Rs 150)

Let’s simplify the part B first.

Here, the lower value of {trading price on 31st Jan, 2008—> Rs 200} and {actual selling price—> Rs 150} is Rs 150.

Now the higher value of {part A (actual cost)—> Rs 100} and {part B—> Rs 150} is Rs 150.

Therefore, in this scenario, the cost of acquisition (purchase price) will be considered as Rs 150.

Further, the actual selling price is also Rs 150.

Overall, capital gain= Rs 150- Rs 150 = 0 (NIL).

Here are the four different scenarios to explain the situation of long-term assets and their capital gains (as described in Income tax departments latest release on LTCG tax)

In all the given scenarios,

Date of Purchase = 1st January 2017
Date of selling > 31st March, 2018 (holding period > 365 days)

S.No Purchase Price
(Rs)
Highest price on
31/1/2018 (Rs)
Selling Price
(After 31/3/2018) (Rs)
Capital Gain
(Rs)
Scenario 1 100 200 250 250-200 = 50
Scenario 2 100 200 150 NIL
Scenario 3 100 50 150 150-100 = 50
Scenario 4 100 200 50 Loss

Long-Term Capital Gain Tax - Simplified

 

Detailed explanation of the scenario:

Although the table given above explains the capital gain, however, here is a detailed explanation for the long-term capital gains tax:

1) Shares bought after 31st January, 2018:

Let the buyer bought 10,000 shares of a stock ABC
Purchase price of 1 share = Rs 100
Total purchase price = Rs 100 * 10,000 shares = Rs 10 lakh

For short term (holding period < 365 days)
Selling price of 1 share= Rs 140
Total selling price= Rs 140 * 10,000 share= 14 lakhs
Short term capital gain (STCG)= Rs 14 lakhs – 10 lakhs = 4 lakhs
STCG Tax = 15% of STCG = 15% of 4 lakhs= Rs 60,000

For long term (holding period > 365 days)
Selling price of 1 share = Rs 180
Total selling price= Rs 180 * 10,000 shares= 18 lakhs
Long term capital gain(LTCG) – Rs 18 lakhs- 10 lakhs= Rs 8 lakhs
Taxable LTCG= 8 lakhs- 1 lakhs= 7 lakhs
(Rs 1 lakh is exempted from long term capital gain tax)
LTCG Tax= 10% of Taxable LTCG= 10% of 7 lakhs= Rs 70,000

2) Shares bought before 31st January 2018:

Let the buyer bought 10,000 shares of a stock ABC
Purchase price of 1 share = Rs 100
Total purchase price = Rs 100 * 10,000 shares = Rs 10 lakh

For short term (holding period < 365 days);
Tax will be same as earlier i.e. 15% of short term gain.

For long term (holding period > 365 days)
Highest price on 31st January, 2018= Rs 150
Selling price of 1 share = Rs 180
Long term capital gain (LTCG) per share exempted from tax = Rs 150- Rs 100 = Rs 50
For computing taxes, LTCG per share = Rs 180- Rs 150= Rs 30
Total LTCG= Rs 30 * 10,000 shares= Rs 3 lakhs
Taxable LTCG= Rs 3 lakhs- Rs 1 lakhs = 2 lakhs
(Rs 1 lakh is exempted from long term capital gain tax)
Tax on LTCG= 10% of 2 lakhs= Rs 20,000

Also read: How Much Can a Share Price Rise or Fall in a Day?

Conclusion:

Here are the key takeaways from this post:

  • The Long-term capital gain tax will be applicable from 1st April 2018 for the financial year 2018-19.
  • Up to Rs 1 lakhs, the long-term capital gains are exempted from LTCG tax.
  • The capital gains exceeding Rs 1 lakhs will be taxed 10% as LTCG tax if you sell the stocks after 1st Ap l, 2017 for the long-term asset.

Further, although the long-term capital gain tax calculation seems complicated, however, it’s quite simple and you can easily calculate it within minutes.

Here is a quick summary of the LTCG Tax for different scenarios:

  1. Shares sold on or before 31st March 2018 —> NIL
  2. Shares purchased on/before 31st January 2018 hold for long-term (over 1 year) and sold after 31st March 2018:
    • Purchase (Buying) Price= Rs 200
    • Highest price on 31st Jan 2018 = Rs 250
    • Selling Price= Rs 280
    • Then taxable LTCG = (Rs 280 – Rs 250) = Rs 30

3. Share purchased after 31st January 2018 —> LTCG Tax@ 10% (when gain exceeds Rs 1 lakhs)

(Image source: CharlesNGO)

That’s all. I hope this post on the long-term capital gain tax is useful to the readers.

Also read: What are the capital gain taxes on share in India?

If you have any questions regards LTCG Tax, feel free to comment below. #HappyInvesting

About Kritesh Abhishek 170 Articles
Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst. I'm 23-year old and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 3+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

6 Comments

    • When you hold a stock and sell it within 1 year at a loss, then it is called short-term capital loss. When the loss is booked after holding the stock over 1 year, then it is the long-term loss. Set-off means to settle up and carry forward means that you can carry the loss for the next financial year. I hope it helps.

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