LTCG as per Finance Bill 2018

Taxation on Long Term Capital Gain

Under the existing regime, long term capital gains arising from transfer of long term capital assets, being equity shares of a company or a unit of equity oriented fund or a unit of business trust, is exempt from income-tax under clause (38) of section 10 of the Act.

The government has proposed to bring back taxation on Long Term Capital Gain arising from the transfer of Long Term Assets being equity shares of a company or a unit of equity oriented fund or a unit of business trust (herein called capital assets) through the Finance Bill 2018. The government through Clause 31 of Finance Bill 2018 has proposed to introduce a new section 112A in the Income Tax Act and to withdraw the exemption under Clause 38 of Section 10.

The proposed Section 112A shall come into force from 1^st April 2018. The proposed taxation shall apply to transfer made on or after 1^st April 2018. Read with all its provisions and provisos the section shall have the following implications.

Capital gain on transfer of Capital Assets shall be taxable @ 10 % if the following conditions are satisfied.:

1. In case of equity shares Security Transaction Tax should have been paid on sale as well as acquisition of the equity shares.

2. The period of holding is a minimum of twelve months.

3. The amount of capital gain should exceed Rs 1,00,000. (Exempt up-to Rs 1,00,000/-)

The government intends to keep the exemption of STT on purchase of equity shares as per notification 43/2017 dated 5^th June 2017.

It is also proposed that the benefit of First and Second proviso to section 48 i.e. indexation shall be not be application to this section. Deduction under Chapter VI-A shall also be not available while computing the tax on Capital Gains.

Another important issue worth looking at is the determination of cost of acquisition.

As per the Clause 31 of Finance Bill 2018:

The cost of acquisition for the purposes of computing capital gains referred to in sub-section (1) in respect of the long-term capital asset acquired by the assessee before the 1st day of February, 2018, shall be deemed to be the higher of—

• the actual cost of acquisition of such asset; and
• the lower of—

1. the fair market value of such asset; and

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

To understand the above clause let’s take a look at a few illustrations.

Illustration 1:

An equity share was acquired on 1^st of January, 2017 at Rs. 1000, its fair market value as on 31^st January 2018 is Rs. 2500. The Assessee sold it on 1^st of April, 2018 at Rs. 3000

As the actual cost of acquisition is less than the fair market value as on 31^st of January, 2018, accordingly, the cost of acquisition would be higher of:

1. actual cost of acquisition : Rs 1000/- and

2. Lower of :

1. Fair market value : Rs 2500/-

2. Sale consideration: Rs 3000

Which comes to Rs 2500/-

The long-term capital gain will be Rs. 500 (Rs. 3000 – Rs. 2500).

Illustration 2:

An equity share was acquired on 1^st of January, 2017 at Rs. 1000, its fair market value is Rs. 2500 on 31^st of January, 2018 and it is sold on 1^st of April, 2018 at Rs. 1500.

In this case, the actual cost of acquisition is less than the fair market value as on 31^st of January, 2018. However, the sale value is also less than the fair market value as on 31^st of January, 2018. Accordingly, the cost of acquisition would be higher of:

1. actual cost of acquisition : Rs 1000/- and

2. Lower of :

1. Fair market value : Rs 2500/-

2. Sale consideration: Rs 1500

Which comes to Rs 1500/-

This the long-term capital gain will be NIL (Rs. 1500 – Rs. 1500).

Illustration 3:

An equity share is acquired on 1^st of January, 2017 at Rs. 1000, its fair market value is Rs. 500 on 31st of January, 2018 and it is sold on 1^st of April, 2018 at Rs. 1500.

Accordingly, the cost of acquisition would be higher of:

1. actual cost of acquisition: Rs 1000/- and

2. Lower of :

1. Fair market value: Rs 500/-

2. Sale consideration: Rs 1500

Which comes to Rs 1000/-

This the long-term capital gain will be Rs 500 (Rs. 1500 – Rs. 1000).

Illustration 4:

An equity share is acquired on 1^st of January, 2017 at Rs. 1000, its fair market value is Rs. 2500 on 31st of January, 2018 and it is sold on 1^st of April, 2018 at Rs. 500.

Accordingly, the cost of acquisition would be higher of:

1. actual cost of acquisition: Rs 1000/- and

2. Lower of :

1. Fair market value: Rs 2500/-

2. Sale consideration: Rs 500

Which comes to Rs 1000

Hence, the long-term capital loss will be Rs. 500 (Rs. 500 – Rs. 1000) in this case.

The government has given following benefits while calculating the Capital Gain

1. Capital Gains up to Rs 1,00,000/- are exempt

2. also by considering the fair market value as on 31^st March 2018 while computing the cost of acquisition the government has exempted the cap gain accrued till 31^st March 2018

The Author can be reached at mayank.pandey@samp.co.in