The Finance Bill 2018 reintroduced tax on LTCG made from listed shares and equity-oriented mutual funds. With Effective 1 April 2018, LTCG arising from the sale of these shares and equity oriented funds that are held for more than 12 months are taxable at the rate of 10% if such LTCG exceeds Rs.1 lakh in the given Financial Year.

The LTCG can be taxable under two things—the exemption for LTCG up to Rs.1 lakh, and the grandfathering provision.If you had invested in equity mutual funds or shares before 31 January 2018, any gains till that date will be considered as grandfathered and thus will be exempt from tax.

Method of determining Cost of Acquisition:

A method of determining the Cost of Acquisition (COA) of such investments has been specifically laid down according to which the COA of such investments shall be deemed to be the higher of-

  1. The actual COA of such investments; and
  2. The lower of-
    • Fair Market Value (‘FMV’) of such investments; and
    • the Full Value of Consideration received or accruing as a result of the transfer of the capital asset i.e. the Sale Price

Tax implications under Grandfathering rule:

Sl No Scenario Tax Implications
1 Purchase and sale before 31/1/2018 Exempt under Section 10(38)
2 Purchase before 31/1/2018

Sale after 31/1/2018 but before 1/4/2018

Exempt under Section 10(38)
3 Purchase before 31/1/2018

Sale on or after 1/4/2018

LTCG taxable

Gains accrued before 31/1/2018 exempt

4 Purchase after 31/1/2018

Sale on or after 1/4/2018

LTCG taxable

Illustration 1

Mr A bought equity shares on 10/March/2016 for Rs. 12,000. FMV of the shares was Rs. 15,000 as on 31/Jan/18. He sold the shares on 10/May/2018 for Rs. 18,000. What will be the long-term capital gain/ loss?

Cost of Acquisition (COA)

Higher of –

  • Original COA i.e. Rs. 12,000, and
  • Lower of –
    • FMV on 31.1.18 i.e. Rs. 15,000, and
    • Sale Price i.e. Rs. 18,000

Hence, COA = Higher of (Rs. 12,000 or Rs. 15,000) = Rs. 15,000

Capital Gain/ (Loss)

  • Sale Price – Cost of Acquisition
  • Rs. 18,000 – Rs. 15,000
  • Rs. 3,000

Illustration 2

Mr A bought equity shares on 10/March/2016 for Rs. 12,000. FMV of the shares was Rs. 15,000 as on 31/Jan/18. He sold the shares on 10/May/2017 for Rs. 18,000. What will be the long-term capital gain/ loss?

In the given scenario both sale and purchase made on or before 31st Jan 2018.

So, LTCG shall be exempt u/s 10(38).

Illustration 3

Mr. A purchased equity shares on 20/Oct/2016 for Rs. 15,000. FMV of the shares was Rs. 10,000 as on 31/Jan/18. He sold the shares on 26/Feb/2018 for Rs. 28,000. What will be the long-term capital gain/ loss?

In the given scenario purchase was made before 31st Jan 2018 and sale made after 31st Jan 2018 but before 1st April 2018.

So ,LTCG shall be exempt u/s 10(38).

Illustration 4

Mr. X bought equity shares on 21-Dec-2016 for Rs. 17,000. FMV of the shares was Rs. 9,500 as on 31-Jan-18. He sold the shares on 21-May-2018 for Rs. 7,000. What will be the long-term capital gain/ loss?

Cost of Acquisition (COA)

Higher of –

  • Original COA i.e. Rs. 17,000, and
  • Lower of –
    • FMV on 31.1.18 i.e. Rs. 9,500, and
    • Sale Price i.e. Rs. 7,000

Hence, COA = Higher of (Rs. 17,000 or Rs. 7,000) = Rs. 17,000

Capital Gain/ (Loss)

  • Sale Price – Cost of Acquisition
  • Rs. 7,000 – Rs. 17,000
  • Rs. (10,000)

(Author can be reached at srinivas.battala77@gmail.com)

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