Long term capital gain Tax on share – Understanding with illustrations

The new budget which was introduced by Mr. Jaitley saw the reintroduction of tax on Long term capital gain @10% with certain restrictions. The pivotal part of this restriction can be entirely put into one word i.e “GRANDFATHERING” as on 31^st January 2018, which certainly is inspired by tweets of Mr. Shashi Tharoor considering the usage of such a rare word.

The Google engine saw a rapid request for this specific word, with people trying to understand the meaning as well as the financial impact it has on their pockets.

Also it is to be noted that tax on long term capital gain is exempt up to Rs 100,000 for total year for an assessee and not per scrip.

A word of North American origin Grandfather means to exempt (someone or something) from a new law or regulation (avoid relating it to any of your lineal ascendant).

I would put down few illustration to make you understand how the word impacts your pocket and how much do you need to shell out in tax on making a profitable taxation in stock exchange.

1) Suppose Ram has bought 100 shares of TCS at Rs 100 per share in the year 1980 (year is just an assumption). TCS has closed approx at Rs 3120 as on 31^st January 2018 on Say, Ram decides to sell all his TCS shares on 31^st December 2018 or may be even next year when it is quoting at Rs 4000. All of the shares of Ram are long term since he is holding it for more than 1 year

Ans :Calculation of Tax:

Due to concept of Grandfathering, any gain made up to 31^st January is totally exempt, so for Ram Rs 3120, since it quotes at this value as on 31^st January, 2018, it becomes the base for calculation of tax.

So total amount of gain per share is 4000-3120= Rs 880 per share. Total gain on sale of 100 shares is Rs 88000. Ram need not pay any tax since total taxable long term gains are below Rs 1 Lakh.

If in the above example. if value of TCS share was quoting at Rs 5000 instead of Rs 4000 as on 31^st December or next year, then total profit per share would have been Rs 1880. Total profit on 100 shares would be 1880×100 = Rs 188,000. Here total taxable long term capital gain for Mr. Ram would be, after deducting initial exemption of Rs 100,000 equal to Rs 88000. So Mr. Ram would pay 10% of 88000 i.e Rs 8800 as tax. If the sale value after 31^st January is less than the base amount of Rs 3120, then no tax needs to be paid on long term shares since it is exempt till the rate quoted on the base date. So if in December the rate is 3000 and Mr. Ram decides to sell all his shares, no capital gain has to be paid.

Now for another situation:

Ram buys 100 shares of TCS on 1^st August, 2017 for Rs 2500 per share. TCS has closed approx at Rs 3120 as on 31^st January 2018 on NSE. Say, Ram decides to sell all his TCS shares for on:

30^th June, 2018 quoted at NSE Rs 3500

OR

Any date after 31^st July 2018 for say Rs 4000

Ans: Calculation of tax in both the above dates:

(i) If all the shares are sold on 30^th June 2018 by Mr. Ram, the holding period of share is less than 1 year, hence no concept of grandfathering is attract and neither is tax@10%., since the gain on above sale is short term capital gain which attracts 15% rate on net So net consideration would be : (3500-2500)x100=Rs 100,000. Exemption of Rs 100,000 would not be available here as it is not long term capital gain and tax of 15000(15%) has to be paid by Mr. Ram.

(ii) If all the shares are sold after 31^st July for Rs 4000 as quoted, the concept of grandfathering comes into picture , since holding period is more than 1 year and stock becomes long term. Here the answer will be like in 1^st illustration, totaling Rs 88000 as long term capital gain as Rs 3120 will form base for calculation. The entire Rs 88000 will be tax free since it is less than Rs 100,000 limit.

I Believe most of the situation related to gains would get covered in the above situation, but the situation can be made a bit complicated with introduction of bonus shares in the long term computation. The 3^rd illustration can be avoided for people who are looking into basics and can just jump into 4^th situation directly for evaluation of losses.

3.) Consider the same situation as in 1^st illustration and say TCS issued bonus 1:1 ratio in year 2005 and another bonus of 1:1 on 1^st August, 2017. What will be the total capital gain and its tax ability if Ram sells his entire holding of TCS on following dates:

(i) 30^th June 2018 @ Rs 4000 per share

Or

(ii) Anytime after 31^st July @ Rs 5000 per share

Ans: Calculation of tax in both the above dates:

The total number of shares held by Mr ram after all the bonus issue will be 400 quantity since twice the bonus of 1:1 was issued during the entire period.

(i) In first case the sale date is 30^th June 2018. The first bonus issue was in the year 2005 and hence it falls in the section of long term shares since holding period is more than 12 months. But 2^nd 1:1 bonus issue is on 1^st august 2017 and hence 200 shares would fall in short term share held.

There is no specific mention in budget about bonus shares and only mention being the gains are grandfathered as on 31^st Jan 2018. So going by the literal interpretation of the law, all bonus share, which have been held for more than 12 months as on 31^st January 2018 would be grandfathered. This is an issue to consider since cost of acquisition for bonus shares is Nil. So in above case 200 shares sold would be considered long term and other 200 shares would be considered short term. For long term shares 31^st Jan 2018 value would be base and hence LTCG would be (4000-3120)*200=Rs 176000. Total tax to be paid is 10% of (176000-100000)=Rs 7600, since Rs 1 lakh is a deduction. On the other 200 shares, 4000*200=Rs 8 Lakh would be taxable short term gain since cost of acquisition of bonus shares is NIL. And tax paid is 8 lakh x 15%= Rs 1 .2 Lakhs.

(ii) In 2^nd case the sale date is anytime after 31^st July @ Rs 5000 per share. Here even the bonus issue as on 1^st august has become long term shares as per holding period concept and entire 400 shares is covered under the concept of grandfathering. Here total long term capital gain of Mr Ram would be (5000-3 120) x 400= Rs 752000. Total tax payable will be @10% on (Rs 7.52 lakhs – Rs 1 lakhs) = Rs 65200.

The 3rd illustration on bonus share is entirely by the understanding of law and interpretation of the words and nothing concrete has been mentioned in budget.

Implication of Loss making shares on the concept of grandfathering:

The concept of grandfathering means to take the value as on 31^st January as base, but then u suddenly realize how precious unitech, educomp, rcom shares are at current market price and you freak out, because their base will be a very negligible amount compared to the purchase rate of 2008-2009 or ipo rate of Rs 500 or more In such cases since the cost of the shares were very high say Rs 500 or more for example and currently they quote at Rs15-20-25, the grandfathering concept will apply but with the cost price of Rs 500 or whatever paid to be considered as base. The above paragraph is from pure understanding of Law and not mentioned specifically in the budget but its an implied fact and should be ideally as stated above.

4.) Suppose Mr. Ram purchased 100 shares of Rcom in year 2008 at Rs 500 and as on 31^st January 2018 it is quoted at Rs 30, If Mr. Ram sells all shares of Rcom @ Rs 50 on 31^st December .What would be the total tax that Mr. Ram has to pay?

Ans: Calculation of Tax

Here for the purpose of Grandfathering the value as on 31^st January will be considered at Rs 500 and not at Rs 30 since the cost of shares is more than current market price on 31^st January, 2018. Now if all the shares are sold for Rs 50, that means total Rs 450 would be Loss per share.

Generally by the understanding of law, if a gain is taxable then any loss arising out of the same nature of income would be set off. But if the gain is tax free then any loss on such business cannot be set off. In the above case if the base is considered at 500 rs per share, Rs 450 is loss per share and since the income is taxable, the loss would be allowed to set off.

But the allowing of loss is general interpretation which is wrong according to me, since govt wont allow such huge amount of long term losses to set off and result in leakage of revenue.

Hence it is free to assume that the rate of Rs 500 is only for computing net gain and not for computing losses since the long term losses are capital in nature

Again there is no clarification in budget about the loss claim and capital loss concept and its highly unlikely the loss would be allowed

(The author can be reached at [email protected])