Here is a simple way to understand how grandfathering works when calculating LTCG tax on equity instruments. Download a free equity LTCG tax calculator to estimate the tax to be paid before you withdraw from an equity mutual fund, You can also use it to calculate STCG, and it will work with debt mutual funds also. The calculator presented here is an update to the Mutual Fund Capital Gains Calculator. The main advantage of this calculator is that you can estimate LTCG or STCG tax to be paid before you make a withdrawal.
Let us now discuss Equity LTCG Tax with grandfathering with a video. The idea is to understand the concept of grandfathering without any math in a visual way so that we can sell at appropriate times to reduce tax. For example, if you wish to switch from regular funds to direct funds, now would be a perfect time to do so. Why? Because the current NAV of almost all equity funds (except arbitrage funds) would be lower than the NAV on Jan 31st 2018. So if you sell or switch, you will not have to pay LTCG tax.
Equity LTCG Tax With Grandfathering Explained: Video
Here are three examples discussed in the video. More examples can be found: Long Term Capital Gains Taxation from Equity: Examples (Budget 2018-2019) and Equity LTCG Taxation: How much tax do I need to pay? Illustration part 1
Equity LTCG Tax when NAV on sell-date is higher than NAV on Jan 31st, 2018
Note that you will have to pay tax only if the sum of all such taxable LTCG (as shown above) across all your equity investments is above Rs. 1 Lakh in a particular financial year. If it is above Rs. one lakh, you will have to pat 10% tax with 4% cess on the amount exceeding one lakh. So for the next few years, the taxation amount will be pretty low for most of us. If you wish to see a detailed example see: Generating tax free income from arbitrage mutual funds
Equity LTCG Tax when NAV on sell-date is lower than NAV on Jan 31st, 2018
Please note that that effective LTCG in this case =0. There is no loss here.
Equity LTCG Tax when NAV on sell-date is lower than NAV on buy-date
This is an actual loss. The sell-NAV is lower than the purchase-NAV (or stock price). You can use this to reduce LTCG from other instruments (incl equity). If you do not have LTCG then you can report this LTCL and carry it forward for the next 8 financial years and offset it when possible.
Additional resources on Equity LTCG taxation
Equity LTCG Tax With Grandfathering Calculator
Many people find it hard to believe but the above calculations have to be performed for each unit or stock sold. So if you have a SIP running, or multiple investments, then you will have to enter all transactions. There is no other way around! Please check the calculations presented and compare it the AMC CG statement. Consult a CA for clarification. If you notice any issues, let me know. Here are a couple of screenshots.
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