# 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 31st 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 31st January 2018 on Say, Ram decides to sell all his TCS shares on 31st 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 31st January is totally exempt, so for Ram Rs 3120, since it quotes at this value as on 31st 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 31st 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 31st 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 1st August, 2017 for Rs 2500 per share. TCS has closed approx at Rs 3120 as on 31st January 2018 on NSE. Say, Ram decides to sell all his TCS shares for on:

30th June, 2018 quoted at NSE Rs 3500

OR

Any date after 31st July 2018 for say Rs 4000

Ans: Calculation of tax in both the above dates:

(i) If all the shares are sold on 30th 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 31st 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 1st 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 3rd illustration can be avoided for people who are looking into basics and can just jump into 4th situation directly for evaluation of losses.

3.) Consider the same situation as in 1st illustration and say TCS issued bonus 1:1 ratio in year 2005 and another bonus of 1:1 on 1st 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) 30th June 2018 @ Rs 4000 per share

Or

(ii) Anytime after 31st 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 30th 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 2nd 1:1 bonus issue is on 1st 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 31st 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 31st 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 31st 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 2nd case the sale date is anytime after 31st July @ Rs 5000 per share. Here even the bonus issue as on 1st 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 31st 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 31st January 2018 it is quoted at Rs 30, If Mr. Ram sells all shares of Rcom @ Rs 50 on 31st 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 31st January will be considered at Rs 500 and not at Rs 30 since the cost of shares is more than current market price on 31st 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 iyer.vicky@gmail.com)

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1. Venkat T says:

If grandfather has 5 lakhs worth of shares and sells it before 31.03.18. He has bank interest of only 1.5 lakh per annum. So he does not file IT returns.
Now does he have to file IT returns for LTCG which is anyway exempt. He does not have aadhar number as his thumb impression is not clear. So he can’t link aadhar to PAN card.
What should he do ?

2. CS Ratilal Bharadva ACS 530 says:

sale of shares in a piece meal basis i.e. 25 shares of two or companies where toal aggregate LTCG is restricted upto a limit of Rs. 1,00,000 during any financial year. whether this possible? where thereis no pension of other benefits available and montly reqirements is Rs. 25,000 or so.Share holding are more than 10 to 15 years old.

3. CS Ratilal Bharadva ACS 530 says:

If I sell the share in piece meal basis, means i.e. out of 200 shares i sell only 25 shares of one company and other 25 shares of two or more companies whereby the total gain is limited with the limit of Rs. 1.00 lakh in a given financial year. Since i am a retired CS of a com. where there is no pension or other source of income. and required fund is Rs. 25000 p.m. for two which will be funded from sale of shares which i am holding for more than 10 to 15 years. required for your guidance by email. ratilal bharada

4. Rajiv Kumar says:

Hello!

Has the day of January 31, 2018 been fixed for Grandfather or Base Value or would be reset every year as January 31, 2019/2020/2021?

Thanks & Regards!
Rajiv

1. Vignesh Iyer says:

it wont be a reset every year. its fixed 31st January 2018. and grandfathering means its exempt till 31st jan 2018 .. so its the base value for computing capital gain .go through illustration 1 , ur query will be solved

5. Manish Kr Joshi says:

Nice n informative article. One query;Do shares n Equity mutual funds have to be combined for computing limit of 1 Lakhs. Looks to be yes but wants to get confirmed

1. Vignesh Iyer says:

Yes it has to be combined. for computation

6. sanu says:

What would the impact on Mutual fund house which may has to sell the stocks when investors redeem the units.
Does Equity MF also need to pay LTCG /STCG tax on the gains generated while booking the profits on stocks?

1. Vignesh Iyer says:

Equity oriented mutual funds have to pay ltcg. As a matter of fact, lot of mutual funds would have already exited midcaps and smallcap stocks, so question doesnt arise of investors reedeming. We will get a btr idea when shareholding pattern comes out after the end of this quarter

1. sanu says:

Thanks Vignesh.
Does this means there could be double taxation in case of an investor who invest via equity MF? MF also pays LTCG or STCG while making profits and so does the investor.
For sure mutual funds need not sell for each resumption, however they might be selling some stocks as part of strategy or sometimes forced to sell when lot of resumption happens in the MF and MFdon’t have the liquidity to pay the investor.

7. Anil Rastogi says:

I congratulate Mr Vig nesh Aiyer on such an illustrated clarification of Long and Short term capital gains. My only query is Does that apply to Mutual Funds also on Long and Short Term Capital Gains.

1. Vignesh Iyer says:

equity oriented mutual funds… 10% tax has to be paid

8. aman says:

Sir please clarify the situation ;

BUYING DATE 15-01-17 ; Rs. 10,00,000/-
VALUE on 31-01-18 ; Rs. 15,00,000/-
SELL DATE 31-3-18 ; Rs. 40,00,000/-

On which amount we have to pay Long Term Capital Gain Tax ?

1. Vignesh Iyer says:

There is a lot of confusion regarding the date of applicablility of this tax. The reason i dint include it in my article. But from my understanding of law, you wont incur any capital gains on long term share if u sell it before 31st march 2018. So in the above case you wont incur tax and it would be exempt under section 10(38) since u sell it on 31st march 2018. Say if you sell it on 01st april 2018 instead for Rs 40 lakhs. So total taxable income would be 40-15= Rs 25 lakhs since 15 becomes the base value in this. Total tax payable on long term shares is (25-1) x 10% = Rs 240,000 + cess
It is long term since it is already more than 12 months from your buying date
I hope this clears it

9. jeet says:

Sir please clarify the situation ;

BUYING DATE 15-01-17 ; Rs. 10,00,000/-
VALUE on 31-01-18 ; Rs. 15,00,000/-
SELL DATE 31-3-17 ; Rs. 40,00,000/-

On which amount we have to pay Long Term Capital Gain Tax ?

1. Vignesh Iyer says:

I fail to understand your query. If u have already sold your holding in 31-3-2017, why would grandfathering apply to you?

10. RAGHAVENDRA K says:

Excellent

11. VISHAL SONI says:

Dear Sir,

Your article on capital gain was very good.

But one thing I fail to understand is that, when the amount of long term capital gain earned by person is less than Rs. 1.00 lacs, then as per you, it is exempt from tax. But sir, exemption from long term capital gain hitherto was provided u/s. 10(38). Now a proviso was inserted in the said section, to the effect that the provisions of that section 10(38) will not be applicable in respect of shares sold after 31.03.2018.

Now under which section of income tax , long term capital gain earned upto Rs. 1.00 lac would be exempt?

Clarification would be required from you sir,

1. Vignesh Iyer says:

apologies for the wrong word used here mr soni, Long term capital gain below Rs 1 lakh is “not .taxable”.
Exempt is a wrong word used by me , though both the things would end up with same amount of tax.
Section 10(38) would only be applicable till 31st march, 2018. Since long term capital gain on shares would come under tax @10%. So the limit of 1 lakh applies from next financial year and there is no section as such disclosed yet. but the limit of 1 lakh would be available for any sale taking place after 31st of march 2018.
I hope this clears the confusion. Feel free to comment if the query isint solved yet