Taxability of Long Term Capital Gains

Jayesh Dadia,
Chartered Accountant

Implications & clarification 

Background
The Finance Bill 2018 has proposed certain amendments with regard to the scheme of taxing Long Term Capital Gain (LTCG) arising on transfer of listed equity shares and units of mutual funds. Under the existing tax regime, LTCG arising from transfer of long term capital asset on which STT is paid is exempt from the income tax u/s 10(38) of the Income Tax Act. However, the present tax exemption was misused and abused as a tool of tax evasion. Even certain manufacturing units had reduced manufacturing activities and diverted their funds to the financial market for earning exempt income, i.e. long term capital gain. Therefore,the proposed amendment will be brought to tax LTCG to avoid conversion of taxable income into exempt income and also to stop its misuse. 

The CBDT has clarified the legal position vide circular no. 370149/20/2018 dated 04.02.2018. 

What is the proposed amendment? 

Under the proposed amendment,the existing Section 10(38) which exempts LTCG is withdrawn and a new section 112A will be introduced which provides that LTCG arising from transfer of certain long term capital asset exceeding Rs 1,00,000 will be taxed at concessional rate of 10%. 

What are long term capital assets?
(a) Equity shares in a company listed on a recognised stock exchange;
(b) Unit of an equity oriented fund; and
(c) Unit of a business trust. 

Further, the above assets must be held for more than the minimum period of 12 months from the date acquisition and the STT should be paid at the time of transfer and also paid at the time of acquisition if the shares are acquired after 1/10/2014. The holding period will be counted from the date of acquisition. 

Year of applicability? 

The new provision is applicable from the assessment year 2019-2020, i.e. transfer of long term capital asset takes place on or after 1/4/2018. Thus, if someone sells listed shares before March 31, 2018, the entire capital gain is exempt u/s 10(38) of the Income Tax Act. 

Working of LTCG 

The LTCG will be computed by deducting the cost of acquisition from the full value of the consideration on transfer of the long term capital asset. The cost of acquisition for long term capital assets acquired on or before 31/1/2018 will be the actual cost. However, if the actual cost is less than the fair market value of such asset as on January 31, 2018, then such fair market value on 31/1/2018 will be deemed to be the cost of acquisition. 

Fair market value 

In case of a listed equity share or unit, the fair market value means the highest price of such share or unit quoted on a recognized stock exchange on January 31, 2018. However, if there is no trading on January 31, 2018, the fair market value will be the highest price quoted on a date immediately preceding January 31, 2018, on which it has been traded. In the case of unlisted unit, the net asset value of such unit on January 31, 2018 will be the fair market value. 

Applicability of TDS provisions. 

No TDS is to be deducted if the LTCG pertains to a resident tax payer. In the case of a non-resident,the provision of Section 195 will be applicable and, accordingly, TDS would be deducted. In case of FII, no TDS will be deducted. 

Whether long term capital loss can be set off 

Under the new provisions, since LTCG is taxable from the financial year 2018-19, the net long term capital loss incurred after 1/4/2018 shall be entitled to be set-off against LTCG and if the net LTCG exceeds Rs 1,00,000, the tax will be paid at 10%. 

Further, the LTCG can also be set off against the other capital losses pertaining to other capital assets. 

Illustration for clarification of the above:
— Shares acquired on 1.12.2016 for Rs 1,00,000
— Shares sold for Rs 5,00,000
— FMV of shares on 31.01.2018 is Rs 2,00,000
— Other capital losses Rs 3,00,000