Long Term Capital Gains Taxation from Equity: Examples (Budget 2018-2019)

Published: February 1, 2018 at 3:45 pm

Last Updated on

As published it was announced in Budget 2018-2019: Long Term Capital Gains from Equity to be taxed at 10%. Here are some examples of how this works.

Example 1:

I purchase 10,000 units of an equity oriented fund (or stock, see definition of fund in the above post) at Rs. 10 NAV per unit on 4th Aug 2017.

As on Jan 31st 2018, the NAV is Rs. 15 per unit. The current value of the investment is Rs. 1,50,000. Now the capital gain as on Jan 31st 2018 (short or long term does not matter) is 50,000. This 50,000 is always tax free IF you sell after 365 days  from initial date of purchase – 4th Augh 2017.

Now you wish to sell on 5th Aug 2018 at a NAV of Rs 25 per unit. The value is Rs. 2,50,000.

The total long-term capital gain is Rs. 1,50,000.

Out of this, Rs. 50,000 is removed as it is the grandfathered tax free portion.

Then the remaining LTCG is Rs. 1,00,000. This amount is also tax free because the taxable equity LTCG should exceed Rs. 1L.

Example 2:

Suppose you had purchased more units on Aug 4th 2017, say 20,000.

Then the grandfather tax-free capital gain is Rs. 1L.

The actual CG = 3L

The taxable long capital gain when you sell 365 days after purchase is 3L- 1L = 2L.

Now 1L is the tax free limit. 2L -1 L = 1L will be  subject to a flat 10% tax.

Example 3:

Now let us consider a simple case of one unit. The 1 lakh tax-free limit on effective LTCG is always applicable but we will ignore it for now.

1 unit purchased at a NAV of 10 on Aug 4th 2017

Nav on Jan 31st 2018 = 15

Nav on Aug 5th 2018 = 11 (sell date).

Actual capital gain = 11 – 10 = 1

Grandfathered capital gain = 15-10 =5.

Effective taxable capital gain = 1 – 5 = 0 (as it is negative).  In this case, only effective LTCG = 0 and not actual LTCG. So this is not a loss and cannot be used for offsetting.

Reference:  Budget memorandum

The cost of acquisition for the purposes of computing capital gains 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 
(i) the actual cost of acquisition of such asset; and
(ii) the lower of—

(a) the fair market value of such asset(price as on Jan 31st 2018)
(b) the full value of the consideration received or accruing as a result of the transfer of the capital asset

That is for the above example:

(i) the actual cost of acquisition = 10

(ii) (a) fair market value on 31st Jan 2018 = 15

(ii) (b) selling price = 11

Take the lower of (ii) (a,b) = 11

Take the higher of (i) and 11 = 11 = cost of acquisition = “effective purchase price”

Taxable CG = selling price – “effective purchase price”  = 11 – 11 = 0

If this confuses you,

Calculate actual CG in the usual way.

Calculate grandfathered CG in the usual way.

If grandfathered CG >actual CG then effective taxable CG = 0.

Thanks to Deepak Shenoy for clarifying this.

Example 4:

1 unit purchased at a NAV of 10 on Aug 4th 2017

Nav on Jan 31st 2018 = 8

Nav on Aug 5th 2018 = 11 (sell date).

Actual capital gain = 11 – 10 = 1

Grandfathered capital gain = 8-10 = 0 (as it is negative).

Effective taxable capital gain = 1 – 0 = 1

Example 5:

1 unit purchased at a NAV of 10 on Aug 4th 2017

Nav on Jan 31st 2018 = 8

Nav on Aug 5th 2018 = 9 (sell date).

Actual capital gain = 9 – 10 = -1 = actual long term capital loss (this can be used for offsetting gains).

Grandfathered capital gain = 8-10 = 0 (as it is negative).

Effective taxable capital gain =  -1 – 0 . So none.

Points to note:

1: The capital gain from date of purchase to Jan 31st, 2018 is tax-free if you sell after 365 days from the date of purchase.

2: There is no benefit in selling now and buying again because of the above point. That portion is always tax-free.

3: If the grandfathered LTCG = 0 or negative then it has to be ignored.

4: If effective taxable LTCG is <0 because grandfathered CG > actual CG, then obviously no tax but this is not a real loss and cannot be used for offsetting purposes.

UPDATE: Equity LTCG Taxation: How much tax do I need to pay? Illustration part 1

Reference: Budget 2018-2019 memorandum

Also see:

Budget 2018: Eight important but lesser known proposals + FAQ

Budget 2018-2019 Major Benefits to Senior Citizens!

 

Budget speech: Scroll to 1: 35:55

 

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