(Source: BloombergQuint)

BQ Explains: How To Compute Long-Term Capital Gains On Shares And The Tax Impact

Thirteen years after it was abolished, long term capital gains tax has been reintroduced on gains made on the sale of listed equity shares. In his Union Budget speech on February 1, Finance Minister Arun Jaitley noted that the equity markets were “buoyant” and that as per tax returns filed for assessment year 2017-18 (financial year 2016-17) the total amount of exempted capital gains from listed shares and units is around Rs 3,67,000 crore.

Major part of this gain has accrued to corporates and LLPs. This has also created a bias against manufacturing, leading to more business surpluses being invested in financial assets.   
Arun Jaitley, Finance Minister (Budget Speech 2018)

Jaitley surmised that the return on equity was quite attractive even without a tax exemption and hence there was a strong case for bringing such long-term capital gains on listed equity under the tax net.

“I propose to tax such long term capital gains exceeding Rs 1 lakh at the rate of 10 percent without allowing the benefit of any indexation. However, all gains up to Jan. 31, 2018 will be grandfathered.”  

The finance minister offered an illustration in his speech to detail the impact of the reintroduced tax.

For example, if an equity share is purchased six months before Jan. 31, 2018 at Rs 100 and the highest price quoted on Jan. 31, 2018 in respect of this share is Rs 120, there will be no tax on the gain of Rs 20 if this share is sold after one year from the date of purchase. However, any gain in excess of Rs 20 earned after Jan. 31, 2018 will be taxed at 10 percent if this share is sold after July 31, 2018. The gains from equity share held up to one year will remain short term capital gain and will continue to be taxed at the rate of 15 percent.

Scenario Gazing

This finance minister offered one scenario but what would be the gains and tax liability if say a share purchased last January at Rs 100, and which hit a high of Rs 150 on Jan. 31, 2018, was sold on April 2, 2018 at Rs 80? Which price would constitute the buying price—Rs 100 or Rs 150 and can the loss be offset against other gains?

Pranav Sayta, tax partner at consulting firm EY, in a discussion on BQ Live, examined five such situations to explain how long-term capital gains will be computed and taxed.

Scenario 1.
Consider an equity share bought last January at Rs 100, and which hit a high of Rs 150 on Jan. 31, 2018, was sold on April 2, 2018 at Rs 200.

Sayta said the long-term capital gain would amount to Rs 50.

BQ Explains: How To Compute Long-Term Capital Gains On Shares And The Tax Impact

Scenario 2.

Consider an equity share bought last January at Rs 100, and which hit a high of Rs 150 on Jan. 31, 2018, was sold on April 2, 2018 at Rs 125.

Sayta said the long-term capital gain would be nil.

BQ Explains: How To Compute Long-Term Capital Gains On Shares And The Tax Impact

Scenario 3.

Consider an equity share bought last January at Rs 100, the highest price of which on Jan. 31, 2018 was Rs 75, was sold on April 2, 2018 at Rs 50.

Sayta said the long-term capital loss would amount to Rs 50.

BQ Explains: How To Compute Long-Term Capital Gains On Shares And The Tax Impact

Scenario 4.

Consider an equity share bought last January at Rs 100, the highest price of which on Jan. 31, 2018 was Rs 75, was sold on April 2, 2018 at Rs 100.

Sayta said the long-term capital gain would be nil.

BQ Explains: How To Compute Long-Term Capital Gains On Shares And The Tax Impact

Scenario 5.

Consider an equity share bought last January at Rs 100, and which hit a high of Rs 150 on Jan. 31, 2018, was sold on April 2, 2018 at Rs 90.

Sayta said the long-term capital loss would amount to Rs 10.

BQ Explains: How To Compute Long-Term Capital Gains On Shares And The Tax Impact

Investors in equity mutual funds would be taxed similarly, Sayta pointed out.

But the fate of those who invested in an Indian company’s shares prior to its initial public offer and subsequent listing on a stock exchange is not clear yet. Because the Union Budget 2018 says the new tax regime applies to shares on which Securities Transaction Tax has been paid (at the time of purchase).

In this video Pranav Sayta and Aashish Somaiyaa, chief executive officer of Motilal Oswal Asset Management Company, examine various scenarios to explain the impact of this new tax and the resultant investor behaviour.

The transactions examined in this story and discussion are only for illustration purpose. Please consult your financial/tax adviser.