Long Term Capital Gains on shares, etc with effect from AY 2019-20

Long Term Capital Gains on transfer of equity shares, units of equity oriented fund and units of business trust shall be taxed under Sec 112A, as the exemption u/s 10(38) has been withdrawn with effect from 1st April 2018.

At present, the Long term capital gains arising from the transfer of capital assets, being equity shares of a company or an unit of equity oriented fund or an unit of business trust, are exempt u/s 10(38) as per the specified conditions in the said section. However, such transactions are liable to Securities Transaction Tax (STT), which was introduced in year 2004.

Finance Act 2018 provides that Sec 10(38) will not be applicable to any income arising from the transfer of long-term capital asset, being ,

a) an equity share in a company or

b) a unit of an equity oriented fund or

c) a unit of a business trust,

made on or after the 1^st April 2018.

Following are the amendments made by Finance Act 2018, regarding the Long Term Capital Gains:

i. A new Section 112A has been inserted, with effect from FY 2018-19 / AY 2019-20. This section is applicable if:

1. Total income includes any income chargeable under the head “Capital gains”
2. capital gains arise from the transfer of a long-term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust
3. Securities transaction tax (STT) has been paid at the time of transfer, and also on acquisition in case of equity shares. (This condition shall not apply to a transfer undertaken on a recognised stock exchange located in any International Financial Services Centre and where the consideration for such transfer is received or receivable in foreign currency.)

Tax on such Long term capital gains shall be 10% on the gains exceeding Rs. 1 Lakhs.

ii. First and second provisos of Sec 48 shall not apply to the capital gains arising from the transfer of a long-term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust referred to in section 112A.

Accordingly, he benefits of indexation (second proviso to Sec 48) or the benefit of computation of capital gains in foreign currency in the case of non-residents (first proviso to Sec 48), shall not be given.

iii. As per Section 55, Cost of Acquisition for the assets referred to in Section 112A acquired before 1^st February 2018, shall be higher of :

1. Cost of acquisition of such asset

2. Lower of:

a. Fair market value of such asset

b. the full value of consideration received or accruing as a result of the transfer of the capital asset

Note: Fair market value means,—

Grandfathering of Long term capital gains till 31^st January 2018

As per the specified method of calculating Cost of acquisition, for Sec 112A specified assets acquired before 1^st February 2018, the gains accrued till 31^st January 2018 have been made exempt.

This can be understood, with the help of following example:

As per Section 55, Cost of acquisition will be higher of:

a) Rs. 100000

b) Lower of:

(i) Rs. 150000

(ii) Rs. 400000

Hence, cost of acquisition is Rs. 150000

So, capital Gains:

          Sale consideration                   Rs. 400000

Less: Cost of acquisition                   Rs. 150000

Long term capital gain                     Rs. 250000 

So, we can see that total Long term capital gain is Rs. 300000, but as per specified provisions of Income tax act, capital gain comes out to Rs. 250000. Hence, gain of Rs. 50,000 accrued till 31st January 2018 has been exempted.