Computation of LTCG on Equity Shares & Equity Oriented Funds

Long Term Capital Gains on Equity Shares & Equity Oriented Funds Taxed @ 10% - Modus of Computation with Sample Calculation

As Expected by Many the Finance Minister Arun Jaitley has Introduced Long Term Capital Gains in Equity Shares and Equity Oriented Funds at the Tax Rate of 10%. 

The Taxes shall arise for Gains Booked on Long Term Capital Assets being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust, made on or after the 1st day of April, 2018

For facilitating this taxation, A New Section 112A have been Introduced. The Provisions of 112A are as follows:-

(1) Notwithstanding anything contained in section 112, the tax payable by an assessee on his total income shall be determined in accordance with the provisions of sub-section (2), if

(i) the total income includes any income chargeable under the head "Capital gains";

(ii) the capital gains arise from the transfer of a long-term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust;

(iii) securities transaction tax under Chapter VII of the Finance (No.2) Act, 2004 has,-

(a) in a case where the long-term capital asset is in the nature of an equity share in a company, been paid on acquisition and transfer of such capital asset; or

(b) in a case where the long-term capital asset is in the nature of a unit of an equity oriented fund or a unit of a business trust, been paid on transfer of such capital asset

(2) The tax payable by the assessee on the total income referred to in sub-section ( 1) shall be the aggregate of- 

(i) the amount of income-tax calculated on such long-term capital gains exceeding one lakh rupees at the rate of ten per cent.; and

(ii) the amount of income-tax payable on the balance amount of the total income as if such balance amount were the total income of the assessee

Provided that in the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, the long-term capital gains, for the purposes of clause (1), shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax

(3) The condition specified in clause (iii) of sub-section (1) shall not apply to a transfer undertaken on a recognized stock exchange located in any International Financial Services Centre and where the consideration for such transfer is received or receivable in foreign currency.

(4) The Central Government may, by notification in the Official Gazette, specify the nature of acquisition in respect of which the provisions of sub-clause (a) of clause (iii) of sub-section ( 1) shall 5 not apply.

(5) The capital gains under sub-section (1) shall be computed without giving effect to the provisions of the first and second provisos to section 48.

(6) The cost of acquisition for the purposes of computing capital gains referred to in sub-section ( 1) in respect of the long-term capital asset acquired by the assessee before the 1st day of February, 10 2018, shall be deemed to be the higher of-

1) the actual cost of acquisition of such asset; and

2) the lower of- (a) the fair market value of such asset; and (b) the full value of consideration received or accruing as a result of the transfer of the capital asset.

"Fair market value" means,- (1) in a case where the capital asset is listed on any recognized stock exchange, the highest price of the capital asset quoted on such exchange on the 31st day of January, 2018:

Provided that where there is no trading in such asset on such exchange on 31st day of 40 January, 2018, the highest price of such asset on such exchange on a date immediately preceding the 31st day of January, 2018 when such asset was traded on such exchange shall be the fair market value;

(ii) in a case where the capital asset is a unit and is not listed on a recognized stock exchange, the net asset value of such asset as on the 31st day of January, 2018;

Note 1: Hence the Gains upto 31.1.2018 shall be Grandfathered and considered as Part of Cost of Acquisition for the Purpose of Computing Capital Gains

Note 2: No Indexation Benefit Allowed

Sample Calculation

Say L&T 200 Shares Bought by Mr X on 1.1.2000 @ 20/- = 4,000/-
Say L&T 200 Shares Quoted on 31.1.2018 @ 2000/- = 4,00,000/-
Say L&T 200 Shares Sold on 1.6.2018 @ 2200/- 4,40,000/-

Capital Gains Chargeable to Tax on 1.6.2018 shall be Rs 40,000/- only while Rs 3,60,000/- shall be protected gains not chargeable to LTCG Tax (Grandfathered Tax)

(7) Where the gross total income of an assessee includes any long-term capital gains referred to in sub-section ( 1), the deduction under Chapter VI-A shall be allowed from the gross total income as reduced by such capital gains.

(8) Where the total income of an assessee includes any long-term capital gains referred to in 20 sub-section ( 1), the rebate under section 87 A shall be allowed from the income-tax on the total income as reduced by tax payable on such capital gains.

What is Equity oriented fund?

Equity oriented fund means a fund set up under a scheme of a mutual fund specified under clause (230) of section 10 and 25 (1) in a case where the fund invests in the units of another fund which is traded on a recognized stock exchange,

(A) a minimum of ninety per cent. of the total proceeds of such fund is invested in the units of such other fund; and

(B) such other fund also invests a minimum of ninety per cent. of its total proceeds in the 30 equity shares of domestic companies listed on a recognised stock exchange; and

(ii) in any other case, a minimum of sixty-five per cent. of the total proceeds of such fund is invested in the equity shares of domestic companies listed on a recognised stock exchange:

Provided that the percentage of equity shareholding or unit held in respect of the fund, as the case may be, shall be computed with reference to the annual average of the monthly averages of 35 the opening and closing figures;

(c) "International Financial Services Centre" shall have the meaning assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005;

(d) "Recognized stock exchange" shall have the meaning assigned to it in clause (i1) of Explanation 1 to clause (5) of section 43.'