Impact of tax on long-term capital gains (LTCGs) , grandfathering & assessment of revised / concessional tax rate

The article illustrates taxation on long term capital gains of equity shares under the grandfathering provisions aligned with change in tax rate under the Taxation (Amendment) Ordinance, 2019:

I. Tax on Long-term capital gains

Long-term capital gains on sale of equity and equity-oriented funds had been exempted u/s 10(38) provided the transfer is subject to Securities Transaction Tax (STT).

With effect from April 1, 2018, long-term capital gains on transfer of equity and equity-oriented funds have been bought under tax regime. This entails that gains earned on transfer up to March 31, 2018 shall continue to be exempt from tax. However, long-term capital gains up to INR 100,000 is exempt.

Long-term capital loss from sale of shares up to March 31, 2018 shall neither be allowed to be set-off or carried forward to subsequent years. Since, long-term gains up to March 31, 2018 are exempt, benefit of loss on security under the exempt category will not be available.

II. Grandfathering provisions

The gains arising up to January 31, 2018 has been grandfathered via introduction of deeming provision which modifies the definition of Cost of Acquisition (“COA”) whilst maintaining the same definition for holding period. COA shall be higher of the below two elements:

a. Actual cost incurred to acquire the security

OR

b. Fair Market Value (“FMV”) of equity share as at January 31, 2018

FMV as at January 31, 2018 shall be lower of:

(i) Sale Consideration

or

(ii) Highest price quoted on NSE or BSE on January 31, 2018 or last traded date before January 31, 2018 – for equity share

NAV of units as at January 31, 2018 – for equity-oriented mutual fund

Below table reflects summary of the probable transactions & tax impact in each case:

S No Transaction Tax impact
1. Purchase → Before January 31, 2018

Sales → Before January 31, 2018

LTCG Not taxable – Exempt u/s 10(38)
2. Purchase → Before January 31, 2018

Sales → After January 31, 2018 but before April 1, 2018

LTCG Not taxable – Exempt u/s 10(38)
3. Purchase → Before January 31, 2018

Sales → On or after April 1, 2018

LTCG Taxable – Grandfathering applicable
4. Purchase → After January 31, 2018

Sales → On or after April 1, 2018

LTCG taxable – Grandfathering not applicable

III. Taxation Laws (Amendment) Ordinance, 2019 (September 20, 2019):

Amendment to sec 115BA – Domestic Company may opt for taxation @ 22% subject to fulfilment of certain conditions i.e. certain deductions / exemptions will not be available to the Company. The Company must opt for this on or before the due date of filing returns specified in section 139 (1) in the previous year. Once the option has been exercised, the Company is required to adhere to it and hence, cannot be subsequently withdrawn for any years. Deductions cannot be claimed u/s 10AA, 32, 32AD, 33AB, 33ABA, 35, 35AD, 35CCC, 35CCD or any other provisions of Chapter VI – A. Set-off or carry forward of loss pertaining to the aforesaid mentioned provision cannot be claimed. Surcharge of flat 10% is applicable in case the Company opts for this concessional rate of 22%.

Section 115JB – Provisions of section 115JB shall not be applicable to the Companies which opts for 22% tax rate u/s 115BAA.

Illustration:

Company A has invested in equity shares of Company B listed on stock exchange. Company A bought 1,000,000 shares at the rate of Rs. 380 per share on April 25, 2003. Company B sold shares on September 8, 2019 at the rate of Rs. 850 per share. The highest price traded on stock exchange as at January 31, 2018 is Rs. 980 per share. During FY’20, Company has made book profit of Rs. 87 crores. Note that Company opts for new tax rate of 22%.

  • Since, shares have been held by Company for approx. 199 months i.e. holding period of listed stock being > 12months, the same shall be long-term in nature
  • Total cost of investment incurred as at April 25, 2003 is Rs. 38 crores

Computation of Capital Gains under sec 112A of Income Tax:

Particulars Amt in crore
Sale consideration 85
Less: Cost of Acquisition (refer table below for calculation of Cost of Acquisition) (85)
Capital Gain
Tax on above

 –

Working to determine the cost of acquisition – Sec 112A of IT   Amt in crore
Actual cost incurred to acquire equity shares (a) 38
FMV as at January 31, 2018 – Lower of b(i) & b(ii) (b) 85
Highest price quoted on stock exchange as at January 31, 2018 b(i) 98
Sale Consideration b(ii) 85
Cost of acquisition for Capital Gain – [ Higher of (a) & (b) ]   85

In the above case, tax on capital gain is Nil and since, Company has opted for 22% tax rate, it is not required to compute / discharge tax u/s 115JB i.e. provisions of MAT are not applicable to the Company.

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Company: Convergent Finance LLP
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I am a competent Chartered Accountant with proficient understanding and working knowledge IFRS, Indian GAAP, Direct Tax and Corporate Laws. 6+ years of post-qualification experience in preparation and analysis / review of Financial Statements of various Companies in varied industries including finan View Full Profile

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