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Long-Term Capital Loss From Share Sale Can Be Set Off, Carried Forward

Losses incurred from selling shares held for over a year can be set off against any other long-term capital gains and carried forward for eight years if the transaction takes place after April 1, the Central Board of Direct Taxes said.

Losses can’t be set off or carried forward if the transaction takes place between Feb. 1 and March 31, said a set of frequently asked questions released by the apex direct tax body.

Allowing investors to carry forward losses is a logical step after removing the exemption on long-term capital gains tax, Riaz Thingna, director at Grant Thornton Advisory, told BloombergQuint.

Fourteen years after being abolished, long-term capital gains tax on equities was reintroduced in Budget 2018-19. Gains of more than Rs 1 lakh made on selling of listed shares—after holding for a period of one year—will attract a 10 percent tax. The benchmark Nifty 50 has since fallen about 4 percent, with the selloff being led by fears over the tax and global cues.

The department clarified the tax would be levied on transfer of shares from April 1, and the gains will be computed by deducting the cost of acquisition from the value on transfer. To explain it better, it listed four scenarios:

Scenario 1

An equity share acquired on Jan. 1, 2017 at Rs 100, has fair market value of Rs 200 on Jan. 31, 2018 and is sold on April 1, 2018 at Rs 250. The fair market value of Rs 200 will be taken as the cost of acquisition, and the long-term capital gain will be Rs 50 (Rs 250 – Rs 200).

Scenario 2

A share acquired on Jan. 1, 2017 at Rs 100, has a fair market value of Rs 200 on Jan. 31, 2018 and is sold on April 1, 2018 at Rs 150. In this case, the actual cost of acquisition is less than the fair market value as on Jan. 31, 2018. However, the sale value is also less than the fair market value as on Jan. 31, 2018. Accordingly, the sale value of Rs 150 will be taken as the cost of acquisition and the long-term capital gain will be NIL (Rs 150 – Rs. 150).

Scenario 3

An equity share acquired on Jan. 1, 2017 at Rs 100, has a fair market value of Rs 50 on Jan. 31, 2018, and is sold on April 1, 2018 at Rs 150. In this case, the actual cost of Rs 100 will be taken as the cost of acquisition, and the long-term capital gain will be Rs 50 (Rs 150 – Rs 100).

Scenario 4

An equity share acquired on Jan. 1, 2017 at Rs 100, has a fair market value of Rs 200 on Jan. 31, 2018 and is sold on April 1, 2018 at Rs 50. In this case, the sale value is less than the fair market value as on Jan. 31, 2018 and also the actual cost of acquisition. Therefore, the actual cost of Rs 100 will be taken as the cost of acquisition in this case, and the long-term capital loss will be Rs 50 (Rs 50 – Rs 100) in this case.

The fair market value will be the highest price of a share or unit quoted on a recognised stock exchange on Jan. 31, 2018, in case of a listed equity, and will be the net asset value of such a unit on Jan. 31, 2018 in case of an unlisted unit.

In case of a bonus issue of shares and a rights issue, the fair market of such shares as on Jan. 31, 2018 will be taken as cost of acquisition, and gains accrued up to Jan. 31, 2018 will be exempt.

The apex direct tax body also clarified that the benefit of inflation indexation for the cost of acquisition of shares will not be available for computing long-term capital gains.

While the proposed taxation regime is aligned with international trends, removal of indexation will substantially reduce the tax arbitrage between long-term and short-term gains, said Thingna.