I just heard that long-term capital gain tax (LTCG) of 10% will be applicable on gains over Rs.100,000 in the Budget 2018 announcement. What will be the impact of this on the markets in the long term? The finance ministers said that “Capital Gains Made On Shares Until Jan 31, 2018 Grandfathered” What does this mean?
Also it’s surprising that STT remains in spite of LTCG being introduced.
The loss to the public exchequer through not taxing Long term capital gains was close to the tune of Rs.3,67,000 crores. To reduce the fiscal deficit, the Government has decided to bring the LTCG under the tax ambit and therefore Long term capital gain from listed equities will now be charged at the rate of 10% if the gains made are exceeding Rs.1,00,000.
Typically you would compute the gains as the difference between your sell price and the buy price. So if you’ve bought a stock at Rs.120 and sold it after 1 year at 230, your gains made on the trade would be Rs.120 (230 - 110). The Government however is extending the benefit of computing your purchase price as the highest price the stock made on the 31st of January 2018. This is what’s referred to as ‘grandfathered’. So if the stock you bought made a high of Rs.210 on 31st January 2018, you’ll not be required to pay taxes on the gains made from 120 - 210 (Rs.90), instead you’ll only be required to pay taxes on the gains made over and above the highest price of the stock - Rs. 20 in this case (230-210).
Also the LTCG will be applicable in all transactions where gains are made by sale of shares post 31st July 2018.
For example, if the equity share is purchased 6 months before 31st January 2018 at Rs100 and the highest price quoted on 31st Jan is Rs120. There will be no tax on the sale, if the stock is sold after 1 year.
However, any gains in excess of Rs20 earned after 31st Jan 2018 will be taxed at 10 percent if this share is sold after 31st July 2018.
So say if my purchase was done at Rs 100, and the highest price as on 31st Jan was Rs 50, and now some days later price is 100rs, so as per this logic my revised cost would be considered as the high on 31st jan that is 50rs in this case, and my selling price of 100rs, so ltcg on 100-50= rs 50, though my initial cost was rs 100 ?
No, you can choose to take the higher of the purchase cost or the highest price the stock went to 31st Jan. So in this case, you’d consider your cost as Rs.100/- and there would be no LTCG upon selling it at 100.
say purchased shares for rs 50, and now on 31st jan high is 100, so higher of the two I can take as my cost, so my cost considered here would be 100, and now if sell my shares at rs 50, so it would be considered as a 50 rs loss? and i can take benefit of the losses ? though my actual cost was 50 and selling was at 50 too
I think Venu @VM1 has beautifully summarized the new LTCG structure and the ‘grandfather effect’ on LTCG. I hope the annexures of the budget speech will give out more clarity on this.
As far as the markets are considered, I think this was already factored in. Governments had dropped hints on taxing capital gains on the sale of equity shares, and my understanding is that serious market participants had already kind of prepared for this. Remember, the FM has introduced a 10% tax on dividend income of over an above 10L in the previous budget. I was in fact, happy to note that the rate was fixed to 10% unlike the short-term capital gains tax of 15%.
It would have really sweet if the FM had factored in indexation benefit. Maybe, someone should start a petition
Personally, I think we are due for a correction, I could be wrong. But if this correction indeed occurs, then I think it would be wrong to attribute this correction to the reintroduction of LTCG (or perhaps the populist budget of 2018).
Suppose I sell two different stocks which I am holding for more than a year with a capital gain of 50k each in one year, Will I have to pay the 10% capital gain tax on the cumulative of the capital gains or is it 0 tax in this case?