Taxation of LTCG on Shares - Analysis of Provision and Calculations

The Government has re-introduced the tax on transfer of long-term capital assets (LTCA) being Equity shares / Equity oriented Mutual fund units / Business trusts vide the finance act 2018.

Earlier section 10 (38) exempted the gains on such transfers if they were subjected to STT at the time of transfer (and in case of shares, at the time of acquisition also). New section 112A has been inserted to tax such long-term capital gains (LTCG) from financial year 2018-19 and onwards. Effectively, section 10 (38) has been withdrawn from the financial year 2018-19.

Taxing of Long term Capital gains:

The new section provides the following:

If the gains from transfer of a LTCA^* being:

• Equity Share(s),
• Units of Equity Oriented Mutual funds,
• Units of Business Trust,

Exceeds Rs. 1,00,000/- , the amount of gain in excess of Rs. 1,00,000/- will be taxed at a rate of 10% (Plus cess or surcharge as applicable).

^*Capital assets mentioned above shall qualify as long-term assets if they are held for more than 12 months.

As per the clarification from the CBDT, Long term capital loss on above class of assets shall be allowed to be set -off against the gains under section 112A, if the transfer takes place on or after 01^st April 2018

Procedure for calculation of Capital Gains under section 112A:

As with any other capital gain, the taxable amount shall be calculated as,

Net realizable value of the asset - Cost of acquisition of the asset 

(Indexation is not allowed for calculation of cost of acquisition)

However, the real challenge is in calculation of cost of acquisition, since the gains being taxed were exempt for very long time before the Finance act of 2018. So the section provides that cost of acquisition shall be calculated as below:

Case A) If the date of acquisition is before 01^st February 2018,

Higher of:
Actual cost of acquisition

Vs.

Lower of:
Fair Market Value (FMV)X or Full value of consideration.

^X FMV is calculated as below

i) If the asset is quoted in a recognized stock exchange:

FMV is the highest price quoted on 31^st January 2018 or if there is no trade on that date, the highest price quoted on a date immediately preceding 31^st January 2018 when the stock was last traded.

ii) In case the asset is not listed:

• FMV is the Net Asset Value (NAV) as on 31.01.2018 in case of Mutual fund units 
• FMV in all other cases shall be  an amount which bears to the cost of acquisition the same proportion as cost inflation index for the F.Y. 2017-18 bears to the cost inflation index for the first year in which the asset was held or for the year beginning on 1st April, 2001, whichever is later

Case B) If acquisition is on or after 01^st February 2018, the cost of acquisition shall be the actual cost of acquisition of the asset.

From Case A, it can be seen that the actual cost of acquisition can be substituted with either:

• Market value of the asset as on 31st January 2018 - if it is higher than actual cost of acquisition and less than Full value of consideration. This ensures that existing investors who held the asset for long term do not get taxed on the entire gains on shares all of a sudden due to change in tax provisions. So the investor is able to get advantage inflating his cost to the amount of share FMV as on date on which tax is first levied (or)
• The full value of consideration - If it is more than actual cost but less than Market value as on 31st Jan 2018. This ensures that total capital gains in this case is zero. So the investor is not taxed on his actual gain (i.e., consideration - actual cost) and at the same time cannot carry forward any loss by substituting market value as on 31st Jan 2018 for cost of acquisition. This ensures that revenue / exchequer is not affected by huge claims for capital loss to be carried forward if the asset's original cost of acquisition and market value as on 31st Jan '18 is very huge.

So this provision gives benefit to both Investors and Tax department by making sure if the assets are sold for any value  between the original cost of acquisition and market value as 31st Jan 2018, the tax is Nil. Effectively this means, for shares acquired till 31st Jan 2018, exemption is deemed to be taken to the extent of market value as on that date.