BHUBANESWAR: The long-term capital gains tax (LTCG) on equity and equity-oriented investments is a reality now. From April 1, LTCG made on transfer of equity mutual funds that have an equity exposure of 65 per cent or more will attract a 10 per cent tax on long-term capital gains above Rs 1 lakh a year. The LTCG made until January 31, 2018, however, remains grandfathered, i.e., the gains will remain tax-exempt.
Many potential and existing investors are clueless about the exact changes effective on their investments. First, let’s get into the basics. For starters, this new tax will apply in any financial year when there is LTCG on redemption of equity MF if you have held those units for at least 12 months. If you sell or exit an equity investment within a year of its purchase, gains will be considered short-term capital gains and taxed at 15.45 per cent, including cess. If you sell it after a year of holding, any gains from the transfer or sale will be considered LTCG and no tax will be applicable.Manish Kothari, director and head of mutual funds, Paisabazaar.com, attempts to dumb down the ways to assess mutual fund investment post-implementation of LTCG.
Before March 31, 2018
For instance, say A Gupta invested Rs 4 lakh in equity funds in March 2015. On January 31, 2018, the value of this investment was Rs 6 lakh. The investment is sold for Rs 7.2 lakh after March 31, 2018. Here, LTCG will be calculated using the cost price on January 31, 2018, which is Rs 6 lakh. Hence the gains will be only Rs 1.2 lakh (Rs 7.2 lakh-Rs 6 lakh). Of this gain of Rs 1.2 lakh, Rs 1 lakh will be tax-free and therefore, only Rs 20,000 will be taxed at 10 per cent, which amounts to Rs 2,000.
After March 31, 2018
In this case, one has to know the fair market value (FMV) of that equity investment as on January 31, 2018 to calculate the gains. This value refers to the highest price of the share or unit quoted on a recognised stock exchange. When you sell an equity investment after April 1, 2018, assuming it was bought before January 31, 2018, you need to calculate the capital gains based on its cost of acquisition. Cost of acquisition is the higher of the purchase price or the FMV on January 31, 2018 (for these shares or mutual fund units). Let’s take an example. A Seth purchased 10,000 shares of ABC Ltd. on January 15, 2016. He bought the shares for Rs 50 each. He sells all the shares on April 15, 2018. The selling price of each share is Rs 200. The FMV on January 31, 2018, of each share is Rs 160. Let us see the impact of the amendment here (see table).
“In fact, investors would now on be subject to a double tax on capital gains made, one being the tax on long-term gains at 10 per cent and the other being the Securities Transaction Tax. Although this outgo of tax can be managed if investors can restrict their gains to Rs 1,00,000,” said Archit Gupta, founder and CEO, ClearTax.