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Trusted by 1L+ Indians
Want to Achieve any of the below Goals upto 80% faster?
Dream Home
Dream Wedding
Dream Car
Retirement
1st Crore
Dream Home
Dream Wedding
Dream Car
Retirement
1st Crore
Trusted by 3 Crore+ Indians
Want to Achieve any of the below
Goals upto 80% faster?
Dream Home
Dream Wedding
Dream Car
Retirement
1st Crore
Trusted by 3 Crore+ Indians
Want to Achieve any of the below
Goals upto 80% faster?
Dream Home
Dream Wedding
Dream Car
Retirement
1st Crore
Trusted by 3 Crore+ Indians
Want to Achieve any of the below Goals upto 80% faster?
Dream Home
Dream Wedding
Dream Car
Retirement
1st Crore
Trusted by 3 Crore+ Indians
Want to Achieve any of the below Goals upto 80% faster?
Dream Home
Dream Wedding
Dream Car
Retirement
1st Crore
Long-Term Capital Gain Tax on Shares
Long-Term Capital Gain Tax on Shares
Introduction to Capital Gains and Their Classification
Capital gains are essentially the profits realized from the sale or transfer of capital assets, which can be either movable or immovable. These assets include a wide range of property types, such as shares, bonds, real estate, and vehicles. The nature of these gains is determined by the holding period of the assets before their transfer, which is crucial for tax purposes.
Capital assets are categorized into two primary types based on their holding periods:
Short-Term Capital Assets: Assets held for a period shorter than or equal to the specified threshold are classified as short-term capital assets. These assets are typically subject to different tax rates compared to long-term assets.
Long-Term Capital Assets: Assets held for a period longer than the specified threshold are classified as long-term capital assets. The holding period for assets to be considered long-term varies across different types of properties and securities.
In the context of financial securities, most market-listed assets qualify as long-term capital assets if held for more than 12 months. Conversely, assets held for a period shorter than 12 months are categorized as short-term capital assets. This distinction affects how the gains from their sale are taxed.
Taxability of Long-Term Capital Gain (LTCG) on Shares
The taxation of long-term capital gains (LTCG) on shares in India has undergone significant changes over the years. Notably, in 2018, the taxation framework for LTCG was revised. While short-term capital gains (STCG) continue to be taxed at a different rate, the rules governing LTCG have been updated to reflect new tax policies.
Historical Context and Changes in Taxation
Before the changes introduced in Budget 2018, long-term capital gains from equity shares and equity-oriented mutual funds enjoyed a tax exemption under Section 10(38) of the Income Tax Act, 1961. This provision was initially included in the Finance Act of 2004 by the Kelkar Committee to attract investments from Foreign Institutional Investors (FIIs) and encourage market participation.
However, the 2018 budget saw the repeal of Section 10(38). This section's removal marked a shift in the tax treatment of long-term capital gains, leading to the introduction of Section 112A. Under this new section, the tax treatment for long-term capital gains on certain assets was revised. Section 112A specifies that gains from the sale of:
Equity shares
Units of equity-oriented mutual funds
Business trusts
are subject to tax under specific conditions.
Current Tax Rates and Provisions for LTCG
Under Section 112A, long-term capital gains on shares and equity-oriented mutual funds are taxed at a rate of 12.5% if the total gains exceed ₹1.25 lakh in a financial year. This rate is applicable in addition to any applicable surcharge and cess. LTCG refers to the profits earned from the sale of shares or mutual funds that have been held for more than one year.
For other securities not explicitly covered under Section 112A, the following tax rates apply:
Listed Shares and Mutual Funds: When Securities Transaction Tax (STT) has been paid, LTCG on these assets is taxed at 12.5%.
Bonds, Debentures, and Other Listed Securities: If STT has not been paid, LTCG on these securities is also taxed at 12.5%.
Debt-Oriented Mutual Funds: These are taxed differently, typically at higher rates compared to equity-oriented securities.
Exemptions on Long-Term Capital Gains
Section 54F of the Income Tax Act provides opportunities for taxpayers to claim exemptions on long-term capital gains under certain conditions. To qualify for this exemption, individuals must meet the following criteria:
Reinvestment in Real Estate: The taxpayer must reinvest the net consideration amount received from the sale of shares into a maximum of two residential properties. Prior to Budget 2019, this limit was restricted to one housing property.
Timeline for Reinvestment: The reinvestment should occur either one year before the sale or within two years after the sale.
Investment in Construction Projects: Alternatively, the proceeds can be invested in a construction project, provided the construction is completed within three years from the date of sale or transfer.
Full Reinvestment Requirement: To avail of the full exemption, the entire net consideration must be reinvested. If the full amount cannot be reinvested, the exemption is proportional to the amount reinvested. The formula for calculating the exemption is:
Exemption on Capital Gain
=
(
Capital Gains
×
Cost of a New House
Net Consideration Value
)
Exemption on Capital Gain=(
Net Consideration Value
Capital Gains×Cost of a New House
)
Sale of New Property: If the newly acquired property is sold within three years of its purchase, the exemption will be revoked, and the gains will become taxable.
Grandfathering Provision
The introduction of income tax on long-term capital gains was accompanied by the concept of "grandfathering" to ease the transition for investors. Grandfathering is a provision that allows individuals to retain benefits based on previous tax regulations if they had made investment decisions under the old regime. This provision protects investors from adverse effects due to sudden policy changes.
Under Section 112A, investors who purchased shares before January 31, 2018, and sold them after April 1, 2018, benefit from grandfathering provisions. The grandfathering concept ensures that:
Securities Purchased and Sold Before January 31, 2018: These transactions are exempt from the new tax regime under Section 10(38).
Securities Purchased Before January 31, 2018, and Sold Before April 1, 2018: These transactions also enjoy exemption under Section 10(38).
Securities Purchased Before January 31, 2018, and Sold After April 1, 2018: Long-term capital gains on these securities are taxed under the new provisions of Section 112A.
Securities Purchased and Sold After January 31, 2018: These transactions are subject to the tax provisions under Section 112A.
Calculation of Long-Term Capital Gain with Grandfathering
When calculating long-term capital gains with grandfathering, the cost of acquisition is crucial. The cost is determined by comparing:
Actual Cost of Acquisition: The price at which the shares were originally bought.
Fair Market Value (FMV) as of January 31, 2018: This is the higher of the FMV on January 31, 2018, or the sale price of the security. If the security was not listed on that date, the highest quoted price from the day preceding January 31, 2018, is used.
The formula for calculating LTCG in this scenario is:
LTCG
=
Full Value Consideration
−
Cost of Acquisition
LTCG=Full Value Consideration−Cost of Acquisition
For example, if Mr. X purchased shares at ₹15,000 on May 1, 2017, and sold them for ₹20,000 on February 1, 2018, with the highest quoted price on January 31, 2018, being ₹18,000, the cost of acquisition would be the higher of the actual cost or the lower of the FMV or sale price. Thus:
Actual Cost of Acquisition: ₹15,000
FMV on January 31, 2018: ₹18,000
Sale Price: ₹20,000
Here, the cost of acquisition is ₹18,000 (the higher of ₹15,000 and the lower of ₹18,000 and ₹20,000). Therefore:
LTCG
=
₹
20
,
000
−
₹
18
,
000
=
₹
2
,
000
LTCG=₹20,000−₹18,000=₹2,000
Handling Long-Term Capital Loss
A long-term capital loss occurs when the cost of acquisition of a long-term asset exceeds its sale price. Such a loss can be set off against long-term capital gains in the same assessment year. If the loss exceeds the gains, it can be carried forward to subsequent years. Long-term capital losses can be carried forward for up to eight assessment years, allowing taxpayers to offset them against future capital gains.
Conclusion
Understanding the tax implications of long-term capital gains on shares is essential for effective financial planning. The changes in tax legislation, including the grandfathering provisions and exemptions under Section 54F, provide investors with opportunities to manage their tax liabilities strategically. By staying informed about the tax rates, exemptions, and calculation methods, investors can make well-informed decisions and optimize their tax outcomes.
Introduction to Capital Gains and Their Classification
Capital gains are essentially the profits realized from the sale or transfer of capital assets, which can be either movable or immovable. These assets include a wide range of property types, such as shares, bonds, real estate, and vehicles. The nature of these gains is determined by the holding period of the assets before their transfer, which is crucial for tax purposes.
Capital assets are categorized into two primary types based on their holding periods:
Short-Term Capital Assets: Assets held for a period shorter than or equal to the specified threshold are classified as short-term capital assets. These assets are typically subject to different tax rates compared to long-term assets.
Long-Term Capital Assets: Assets held for a period longer than the specified threshold are classified as long-term capital assets. The holding period for assets to be considered long-term varies across different types of properties and securities.
In the context of financial securities, most market-listed assets qualify as long-term capital assets if held for more than 12 months. Conversely, assets held for a period shorter than 12 months are categorized as short-term capital assets. This distinction affects how the gains from their sale are taxed.
Taxability of Long-Term Capital Gain (LTCG) on Shares
The taxation of long-term capital gains (LTCG) on shares in India has undergone significant changes over the years. Notably, in 2018, the taxation framework for LTCG was revised. While short-term capital gains (STCG) continue to be taxed at a different rate, the rules governing LTCG have been updated to reflect new tax policies.
Historical Context and Changes in Taxation
Before the changes introduced in Budget 2018, long-term capital gains from equity shares and equity-oriented mutual funds enjoyed a tax exemption under Section 10(38) of the Income Tax Act, 1961. This provision was initially included in the Finance Act of 2004 by the Kelkar Committee to attract investments from Foreign Institutional Investors (FIIs) and encourage market participation.
However, the 2018 budget saw the repeal of Section 10(38). This section's removal marked a shift in the tax treatment of long-term capital gains, leading to the introduction of Section 112A. Under this new section, the tax treatment for long-term capital gains on certain assets was revised. Section 112A specifies that gains from the sale of:
Equity shares
Units of equity-oriented mutual funds
Business trusts
are subject to tax under specific conditions.
Current Tax Rates and Provisions for LTCG
Under Section 112A, long-term capital gains on shares and equity-oriented mutual funds are taxed at a rate of 12.5% if the total gains exceed ₹1.25 lakh in a financial year. This rate is applicable in addition to any applicable surcharge and cess. LTCG refers to the profits earned from the sale of shares or mutual funds that have been held for more than one year.
For other securities not explicitly covered under Section 112A, the following tax rates apply:
Listed Shares and Mutual Funds: When Securities Transaction Tax (STT) has been paid, LTCG on these assets is taxed at 12.5%.
Bonds, Debentures, and Other Listed Securities: If STT has not been paid, LTCG on these securities is also taxed at 12.5%.
Debt-Oriented Mutual Funds: These are taxed differently, typically at higher rates compared to equity-oriented securities.
Exemptions on Long-Term Capital Gains
Section 54F of the Income Tax Act provides opportunities for taxpayers to claim exemptions on long-term capital gains under certain conditions. To qualify for this exemption, individuals must meet the following criteria:
Reinvestment in Real Estate: The taxpayer must reinvest the net consideration amount received from the sale of shares into a maximum of two residential properties. Prior to Budget 2019, this limit was restricted to one housing property.
Timeline for Reinvestment: The reinvestment should occur either one year before the sale or within two years after the sale.
Investment in Construction Projects: Alternatively, the proceeds can be invested in a construction project, provided the construction is completed within three years from the date of sale or transfer.
Full Reinvestment Requirement: To avail of the full exemption, the entire net consideration must be reinvested. If the full amount cannot be reinvested, the exemption is proportional to the amount reinvested. The formula for calculating the exemption is:
Exemption on Capital Gain
=
(
Capital Gains
×
Cost of a New House
Net Consideration Value
)
Exemption on Capital Gain=(
Net Consideration Value
Capital Gains×Cost of a New House
)
Sale of New Property: If the newly acquired property is sold within three years of its purchase, the exemption will be revoked, and the gains will become taxable.
Grandfathering Provision
The introduction of income tax on long-term capital gains was accompanied by the concept of "grandfathering" to ease the transition for investors. Grandfathering is a provision that allows individuals to retain benefits based on previous tax regulations if they had made investment decisions under the old regime. This provision protects investors from adverse effects due to sudden policy changes.
Under Section 112A, investors who purchased shares before January 31, 2018, and sold them after April 1, 2018, benefit from grandfathering provisions. The grandfathering concept ensures that:
Securities Purchased and Sold Before January 31, 2018: These transactions are exempt from the new tax regime under Section 10(38).
Securities Purchased Before January 31, 2018, and Sold Before April 1, 2018: These transactions also enjoy exemption under Section 10(38).
Securities Purchased Before January 31, 2018, and Sold After April 1, 2018: Long-term capital gains on these securities are taxed under the new provisions of Section 112A.
Securities Purchased and Sold After January 31, 2018: These transactions are subject to the tax provisions under Section 112A.
Calculation of Long-Term Capital Gain with Grandfathering
When calculating long-term capital gains with grandfathering, the cost of acquisition is crucial. The cost is determined by comparing:
Actual Cost of Acquisition: The price at which the shares were originally bought.
Fair Market Value (FMV) as of January 31, 2018: This is the higher of the FMV on January 31, 2018, or the sale price of the security. If the security was not listed on that date, the highest quoted price from the day preceding January 31, 2018, is used.
The formula for calculating LTCG in this scenario is:
LTCG
=
Full Value Consideration
−
Cost of Acquisition
LTCG=Full Value Consideration−Cost of Acquisition
For example, if Mr. X purchased shares at ₹15,000 on May 1, 2017, and sold them for ₹20,000 on February 1, 2018, with the highest quoted price on January 31, 2018, being ₹18,000, the cost of acquisition would be the higher of the actual cost or the lower of the FMV or sale price. Thus:
Actual Cost of Acquisition: ₹15,000
FMV on January 31, 2018: ₹18,000
Sale Price: ₹20,000
Here, the cost of acquisition is ₹18,000 (the higher of ₹15,000 and the lower of ₹18,000 and ₹20,000). Therefore:
LTCG
=
₹
20
,
000
−
₹
18
,
000
=
₹
2
,
000
LTCG=₹20,000−₹18,000=₹2,000
Handling Long-Term Capital Loss
A long-term capital loss occurs when the cost of acquisition of a long-term asset exceeds its sale price. Such a loss can be set off against long-term capital gains in the same assessment year. If the loss exceeds the gains, it can be carried forward to subsequent years. Long-term capital losses can be carried forward for up to eight assessment years, allowing taxpayers to offset them against future capital gains.
Conclusion
Understanding the tax implications of long-term capital gains on shares is essential for effective financial planning. The changes in tax legislation, including the grandfathering provisions and exemptions under Section 54F, provide investors with opportunities to manage their tax liabilities strategically. By staying informed about the tax rates, exemptions, and calculation methods, investors can make well-informed decisions and optimize their tax outcomes.
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