LTCG Tax on Shares & Equity Mutual Funds
Budget 2018 has re-introduced Long-Term Capital Gains Tax arising from sale or transfer of equity shares as well as equity mutual funds at the flat rate of 10% without indexation. Tax on Short-Term Capital Gains remains the same at 15%. The proposed amendment will be applicable from Assessment Year 2019-20 i.e. Financial Year 2018-19. Let’s dive into the details of the proposed amendment.
Conditions pertaining to Long-Term Capital Gains Tax
- The holding period of more than 12 months is considered as long-term and any gains made in this case would be taxable at a flat rate of 10% without the benefit of indexation.
- Long-Term Capital Gains up to Rs.1 lakh is made exempt from tax i.e. if LTCG is below Rs.1 lakh in the whole year (not one scrip) no tax would be levied.
- All the Long-Term Capital Gains up to 31st January 2018 are Grandfathered i.e. are out of the ambit of LTCG Tax.
- Do remember that there is no change in the taxation regime of Short-Term Capital Gains and the same will still be taxable at a flat rate of 15%.
Calculation of Long-Term Capital Gains Tax as per Budget 2018
In the speech, the Finance Minister has Grandfathered all the gains made up to 31st January, so it becomes necessary to understand the exact tax implication.
The Finance Bill 2018 has laid down the procedure to find out the cost of capital (purchase price) and the amount of capital gains made thereon.
“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,
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; and
(b) the full value of the consideration received or accruing as a result of the transfer of the capital asset.”
Let’s understand the above statement with an example:
Long Term Capital Gains Tax was abolished in the year 2004 and Securities Transaction Tax was introduced in place of LTCG Tax. But Union Budget 2018 has re-introduced LTCG tax without being done away with STT. So now equity share investors have to pay both LTCG tax and STT of 0.1% paid both at the time of buying as well as selling.
Long Term Capital Gains Tax on Equity Mutual Funds after Budget 2018
Along with Long-Term Capital Gains Tax, Finance Bill has also proposed to impose dividend distribution tax (DDT) of 10% for a mutual fund. DDT is a tax which is paid by mutual fund houses before they pay the dividend. Strangely, there is a limit of Rs.1 lakh under Long-Term Capital Gains Tax but DDT will be borne by all equity oriented mutual fund investors irrespective of the dividend amount.