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

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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47 thoughts on “Long Term Capital Gains Taxation from Equity: Examples (Budget 2018-2019)

  1. What if the units are at loss… Say at RS 8 as on 31/01/18 and than shoots up to 25 on 5th August 2018?
    What would be capital gain ?
    25-8 or 25-10?

  2. Very nice and Crisp explanation. Pity that there are still a lot people in India who do pot want to pay tax on anything who would obviously do not like this. May be Govt should think of putting upper line Say 3 years when the LTCG should be Zero. 10% is not at alll a high tax level.

  3. Not a comment but a foolish question from me.Will every one will have to pay 10% long term capital gain (above one lakh rupees) irrespective of his income tax slab OR will this 10% be added to one’s annual income and taxed according to his income tax slab?

    1. If you have income below the taxable limit, up to that limit, you can deduct the taxable LTCG from equity and also from other. Very good question!

  4. Thanks a lot for your simple explanation (through examples) to make us understand better..
    So, do we need to take the snap-shot portfolio with fund NAV (as on end of Jan’18) and archive somewhere, so that we can use it for LTGC tax calculation at the time of redemption?

  5. Let me understand better.If there are three people in 10%,20% and 30% income slab with annual tax liability (excluding LTCG tax ) of x,y and Z respectively.If all of them have the same LTCG tax(10% of long term capital gain above on lakh) of A,their tax liability will be x+A,,y+A and Z+A respecively OR will the tax liability be x+ 10% of A,y+20% of A and Z+30 % of A respectively?

  6. It appears that the LTCG tax on equity mutual fund is flat 10% for all income tax slabs.If correct it is unfair that an individual earning one crore per year and an individual earning five lakh per year have to pay tax on LTCG at the same rate.

  7. It is very helpful. Particularly after budget. I have confusion I m investing in three mutual fund and one elss since five years for long term after 15 years it will become 40 lacs including my investment 15 lacs how much intt I have to pay?

  8. Dear Pattu I am afraid, that on above example#2 definately 10% LTCG tax to be paid. My question here during that investment period MF house might have done transactions (purchase & sold) many times and on that MF house also might need to pay LTCG tax or not? My view is that mf house also need to pay tax on that earnings and MF house deduct as expenses and set the NAV accordingly

    If my assumption is correct then is is not that investor had to pay tax once he redeem units and another time by MF house indirectly as expenses?

    Please clarify it.

  9. Is this limit applicable for each mutual fund or on aggregate across all funds?

    How would bonus/rights/convertibles alter the LTCG if such is in the offing for a stock?

    Let’s say a person has a large corpus for retirement and still investing. Since it is already longterm, all his holdings have appreciated significantly. Does he benefit by just booking profits year on year until the limit of 1 lakh?

    1. Does he benefit by just booking profits year on year until the limit of 1 lakh? Not by much. Needless I would say
      Stock dividends and other corporate actions are untouched.
      The limit is aggregate of all funds.

  10. In example 2, should the taxable LTCG not be 1 lakh, as the first 1 lakh is exempt? i.e. if some one has 1 lakh LTCG his tax due is zero, but if some one else has 1.1 lakh LTCG, his due is 11k? This does not sound fair, and this is not how tax slabs work too if I understand correctly

  11. Hi Professor,
    In the second example, isn’t it only 1lakh that is taxed at 10%? The total cg is 3 lakh of which 1lakh will be grandfathered. And of the remaining 2lakhs, one lakh is exempted and only the remaining one lakh will be taxed. If this is not the case, then it would be very unfair for some one who might have purchased 10001 units resulting in a chance of 10010 after exempting the grand fathered part. If the one lakh exemption is not allowed, then he will have to pay 1001 as tax for earning just 10rs more. To avoid such problems, the marginal rates kick in, usually.

  12. Dear Pattu Sir,
    Suppose LTCG is 1 lac, Then i guess no tax.
    If it is 1.1 lac then 10% of Which amount tax applicable? complete amount or only 10000 (excess of 1 lac)?

    Second thing, if we pay 10% on LTCG, Remaining amount also will be added to your income and will be again paid tax on that if your cross income ladder? Is it not double tax on same gain?

    Little confused,

    1. Your second point or understanding is wrong. Once you account for LTCG, there is no need to add it to income.
      You calculate the next taxable CG. If that is above 1L, you pay tax on entire amount.

  13. Dear Sir, Is LTCG cumulative? If I sell multiple shares/MF units, is LTCG applied individually or all gains added & deduction calculated.

  14. Thank you Sir. This really helps in understanding LTCG towards MF. Do we have any plans to upgrade “Google spreadsheet portfolio tracker for stocks and mutual funds” with LTCG??

    Thank you,
    Sankar

  15. If equity moves up heavily, we will have to sell equity to re-balance to our desired debt/equity ratio.How do we handle the annual re-balancing issue now?
    Your valuable opinion is solicited.

  16. This is going to create a nightmare for sip investors when they start withdrawing.

    Question, if I have 2 lakh interest income and 2 lakh ltcg. Do I pay 5% on 1.5 lakh or 10% on 1 lakh as tax? How is the tax calculation in such case?

  17. Thank you for your exhaustive analysis. Kindly provide excel calculation sheet for computing capital gain for SIP mode investments (done each month). For e.g. If SIP is done for 60 months, and the entire fund value is redeemed at one go in 61st month, it will be cumbersome to quantify the capital gain since the cost price/ NAV for each month differs. Thanks.

  18. I have LTCL – long term cap loss accumulated from yesteryears. These were from the era when FMPs used to give 10% and I had pseudo losses due to double indexation , due to the 1 year rule prevailing then (that too was jettisoned by Jaitley in his 1st budget to 3 years and these indexation benefits were substantial, before the era when govt started ‘managing’ the CPI index too),all are pseudo losses and sitting in return and the 8 year carry forward will help
    Question is- can I use this LTCL to set off this LTCG from equity and equity MFs? I think common sense says Yes but in my life, I am yet to see common sense and Govt having any semblance of overlap !!!just like one of the doctor’s post above, I had to sacrifice a lot to get to where I am today and mind you, it’s not very high. So far, I have got almost nothing from any govt and believe me, this 10% is a start. They will throttle it whenever they come up with something else , just to keep them in power. And mind you, it’s not mere 10%. Let’s say if u r just in the border of draconian surcharge, it’s much much higher. Just when you think that your retirement is secured, here comes one more gulliotone to cut one more finger. And imagine the paper work from this irksome computation. Anyway, as long as we are not capable of making it to vote relevant group, this is how we will be trashed.
    Looking for answers on set off Question.
    Thx a ton in advance

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