- What is the meaning of long term capital gains?
Long term capital gains mean, gains arising from the transfer of long-term capital asset. The Finance Bill 2018 proposes to provide for a new long-term capital gains tax regime for the following assets:- Equity Shares in a company listed on a recognised stock exchange;
- Unit of an equity-oriented mutual fund; and
- Unit of a business trust.
The proposed regime applies to the above assets, if the assets are held for a minimum period of twelve months from the date of acquisition.
- When will the tax be levied?
The tax will be levied only upon transfer of the long-term capital asset on or after 1st April 2018. - What is the method for calculation of long-term capital gains?
The long-term capital gains will be computed by deducting the cost of acquisition from the full value of consideration on transfer of the long-term capital asset. - How do we determine the cost of acquisition for assets acquired on or before 31st January 2018?
The cost of acquisition for the long-term capital asset acquired on or before 31st of January 2018 will be the actual cost. However, if the actual cost is less than the fair market value of such asset as on 31st of January 2018, the fair market value will be deemed to be the cost of acquisition. Further, if the full value of consideration on transfer is less than the fair market value, then such full value of consideration or the actual cost, whichever is higher, will be deemed to be the cost of acquisition. - How will the fair market value be determined?
In case of a listed equity share or unit, the fair market value means the highest price of such share or unit quoted on a recognized stock exchange on 31st of January 2018. However, if there is no trading on 31st January 2018, the fair market value will be the highest price quoted on a date immediately preceding 31st of January 2018, on which it has been traded. In the case of unlisted unit, the net asset value of such unit on 31st of January 2018 will be the fair market value. - Please provide illustrations for computing long-term capital gains in different scenarios, in the light of answers to questions 4 and 5 above.
The computation of long-term capital gains in different scenarios is illustrated as under:- Scenario 1 – An equity share is acquired on 1st of January 2017 at Rs. 100, its fair market value is Rs. 200 on 31st of January 2018 and it is sold on 1st of April 2018 at Rs. 250. As the actual cost of acquisition is less than the fair market value as on 31st of January 2018, the fair market value of Rs. 200 will be taken as the cost of acquisition and the long-term capital gain will be Rs. 50 (Rs. 250 – Rs. 200).
- Scenario 2 – An equity share is acquired on 1st of January 2017 at Rs. 100, its fair market value is Rs. 200 on 31st of January 2018 and it is sold on 1st of April 2018 at Rs. 150. In this case, the actual cost of acquisition is less than the fair market value as on 31st of January 2018. However, the sale value is also less than the fair market value as on 31st of January 2018. Accordingly, the sale value of Rs. 150 will be taken as the cost of acquisition and the long-term capital gain will be NIL (Rs. 150 – Rs. 150).
- Scenario 3 – An equity share is acquired on 1st of January 2017 at Rs. 100, its fair market value is Rs. 50 on 31st of January 2018 and it is sold on 1st of April 2018 at Rs. 150. In this case, the fair market value as on 31st of January 2018 is less than the actual cost of acquisition, and therefore, the actual cost of Rs. 100 will be taken as actual cost of acquisition and the long-term capital gain will be Rs. 50 (Rs. 150 – Rs. 100).
- Scenario 4 – An equity share is acquired on 1st of January 2017 at Rs. 100, its fair market value is Rs. 200 on 31st of January 2018 and it is sold on 1st of April 2018 at Rs. 50. In this case, the actual cost of acquisition is less than the fair market value as on 31st January 2018. The sale value is less than the fair market value as on 31st of January 2018 and also the actual cost of acquisition. Therefore, the actual cost of Rs. 100 will be taken as the cost of acquisition in this case. Hence, the long-term capital loss will be Rs. 50 (Rs. 50 – Rs. 100) in this case.
- Whether the cost of acquisition will be inflation indexed?
It is clarified that the benefit of inflation indexation of the cost of acquisition would not be available for computing long-term capital gains under the new tax regime. - What is the date of commencement of the proposed new tax regime?
The proposed new tax regime will apply to transfer made on or after 1st April 2018. The existing regime providing exemption under clause (38) of section 10 of the Act will continue to be available for transfer made on or before 31st March 2018. - What will be the tax treatment of accrued gains upto 31st January 2018?
As the fair market value on 31st January 2018 will be taken as cost of acquisition (except in some typical situations explained in Point 6.), the gains accrued upto 31st January 2018 will continue to be exempt. - What will be the tax treatment of transfer of share or unit between 1st February 2018 to 31st March 2018?
As replied in Point 9 above, the new tax regime will be applicable to transfer made on or after 1st April 2018, the transfer made between 1st February 2018 and 31st March 2018 will be eligible for exemption under clause (38) of section 10 of the Act. - What will be the tax treatment of transfer made on or after 1st April 2018?
The long-term capital gains exceeding Rs. 1 Lakh arising from transfer of these asset made on after 1st April 2018 will be taxed at 10 per cent. However, there will be no tax on gains accrued upto 31st January 2018 as explained in Point 9 above. - Whether tax will be deducted at source in case of gains by resident tax payer?
No. There will be no deduction of tax at source from the payment of long-term capital gains to a resident tax payer. - Whether tax will be deducted at source in case of payment of long-term capital gains by non-resident tax payer (other than a Foreign Institutional Investor)?
Yes. Ordinarily, under section 195 of the Act, tax is required to be deducted on payments made to non-residents, at the rates prescribed in the Finance Act. In terms of the said provisions, tax at the rate of 10 per cent. will be deducted from payment of long-term capital gains to a non-resident tax payer. - What will be the treatment of long-term capital loss arising from transfer made between 1st February 2018 and 31st March 2018?
As the exemption from long-term capital gains under clause (38) of section 10 will be available for transfer made between 1st February 2018 and 31st March 2018, the long-term capital loss arising during this period will not be allowed to be set off or carried forward. - What will be the treatment of long-term capital loss arising from transfer made on or after 1st April 2018?
Long-term capital loss arising from transfer made on or after 1st April 2018 will be allowed to be set-off and carried forward in accordance with existing provisions of the Act. Therefore, it can be set-off against any other long-term capital gains and unabsorbed loss can be carried forward to subsequent eight years for set-off against long-term capital gains.