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equity oriented fund and units of business trust shall be taxed under Sec 112A, as the exemption u/s 10(38) has been withdrawn with effect from 1st April 2018.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

Case Fair Market Value
When the capital asset is listed on any recognised stock exchange as on the 31st day of January, 2018 The highest price of the capital asset quoted on such exchange on the said date.

If there is no trading on the 31st day of January, 2018, FMV shall be the highest price of such asset on such exchange on a date immediately preceding the 31st day of January, 2018 when such asset was last traded.

Where the capital asset is a unit which is not listed on a recognised stock exchange as on the 31st day of January, 2018 Net asset value of such unit as on the said date
In case of equity share, which is:
a) not listed on a recognised stock exchange as on the 31st day of January, 2018 but listed on such exchange on the date of transfer
b) listed on a recognised stock exchange on the date of transfer and which became the property of the assessee in consideration of share which is not listed on such exchange as on the 31st day of January, 2018 by way of transaction not regarded as transfer under section 47
An amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the financial year 2017-18 bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the first day of April, 2001, whichever is later.

Grandfathering of Long term capital gains till 31st January 2018

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

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

Date of Purchase 01.01.2016
Date of Sale 01.05.2018
Cost of Purchase 100000
Sale consideration 400000
FMV as on 31.01.2018 150000

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.

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9 Comments

  1. MUKUND says:

    1)old contract note contains for purchase/sale of shares – gross rate/brokerage/service tax/ s.tax transaction charge/stamp charge/trans.charge 2)new purchase/sale contract note has gross rate/brokerage /stt/cgst,sgst/ exchange trans. charge/ sebi t.o.fee /stamp duty.
    1)FOR COST OF ACQUISITION / SALE PURPOSE – WHICH OF ABOVE BROKERAGE / TAXES TO BE ADDED TO GROSS RATE ? FOR WORKING OUT STCG / LTCG . 2)BROKER GIVE 31/01/2018 CLOSING PRICE OF SCRIP. CAN WE TAKE THAT FOR F.M.V. PURPOSE ? MUKUND

  2. Nikhil Mathur says:

    How does one setoff STCL in AY 19-20? For example I have:
    STCL on listed equity shares Rs 50,000
    LTCG on listed equity shares Rs 1,40,000 and LTCG on debt oriented MFs Rs 60,000.
    Which of the approaches below is correct?
    A) Setoff STCL fully against LTCG on equity shares. Hence net LTCG on equity shares = 1,40,000 – 50,000 = Rs 90,000. Since this is lower than exemption of Rs 1 lakh, no tax is payable. LTCG on debt funds Rs 60,000 would be fully taxable.
    OR,
    B) Setoff STCL fully against LTCG on debt MFs. Hence net LTCG on debt MFs = 60,000 – 50,000 = Rs 10,000 on which tax would be payable. Regarding LTCG on equity shares, after applying the exemption of Rs 1 lakh, Rs 40,000 would be taxable @ 10% without indexation.
    Which of the approaches above is correct?

  3. Sathish Kamath says:

    Suppose I sell shares of 4 listed companies, held for more than 1 year, the gains of which are Rs.50000/- Rs.10000/- Rs.18000/- Rs.32000/- (Gains of individual shares is within 1 lakh) totalling to Rs.110000/-, what will be the tax liability

  4. SATHISH KAMATH says:

    Suppose after 01-04-2018, I sell shares of 4 companies (held for more than 1 year) gains of which are Rs.50000/-, Rs.10000/- Rs.18000/-, Rs.32000/- totaling to Rs.110000/- (But individually their total is not with in one lac) what will be the tax liability.

    1. Batha says:

      I had 184 ACC shares, 2400 Tata Motors shares, and 55 Torrent Power shares which were transmitted to me from mother/aunt several years ago. The price of each scrip on NSE on 31st Jan 2018 was higher than when I sole them in Feb 2019. The total value of the shares as of 31st Jan 2018 was @ Rs. 12 lakh, while the total sale consideration was @ Rs. 6 lakh. Would it be a case of long-term capital loss? Pl clarify. Batha

  5. Lokesh Deopura says:

    Please check if Rs. 10 lakhs to be read as 1 Lakh in your article in Line:

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

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