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Tax On LTCG And What It Means For You?

Over the last few years, our stock markets had risen and shown promising returns because of which people preferred investing in equity rather than bank deposits.

Moreover, these gains also came with a few tax benefits due to which the government lost out on a lot of revenue. That’s why tax on LTCG which what was discontinued in 2005, by P.Chidambran (Ex-finance Minister of India), has been brought back after Budget 2018.

What are Capital Gains?

Any gains on selling a capital asset such as shares, bonds, real estate, gold etc. are called as capital gains. Simply put when the selling price of an asset is more than it’s buying price it’s a capital gain, and when the selling price of an asset is less than its buying price it’s a capital loss.  These capital gains are divided into short term and long term capital gains. The gains made on selling assets like (shares, bonds, mutual funds) within 1 year of buying them are called as STCG (short-term capital gains) and the gains made after 1 year of buying them are called as LTCG (long-term capital gains.

What are the taxes on capital gains?

Currently, STCG on equity shares and equity mutual funds are taxed at 15% and LTCG are tax-free. But post 1st April, LTCG on equity investments (equity shares, equity mutual funds or equity in a business unit) beyond Rs. 1,00,000 will be taxed at 10% without indexation (a method to tax returns on investments at a base price to prevent investors from inflation) benefit. 

How to escape this tax?

You can’t entirely escape this tax but for protecting the interest of investors who had invested keeping in mind the earlier tax laws the government provides two relief measures:

#1 – The new tax routine will be effective from 1st of April 2018 & hence if you sell your equity or mutual equity fund before 31st of March you can still claim tax exemption on long-term capital gains.

TAX ON LTCG
FMV-Fair Market Value i.e. Market Price

#2 – The tax levied under the new norm has two conditions to it:

 

  1. 10% tax will be levied on gains above Rs. 1,00,000 made on selling equity based assets after 1 year of their purchase. 
  2. The tax will be calculated on the difference between the selling price and cost of purchase or cost on January 31st, 2018, whichever is higher of the two. This is done so that any gains made before January 31st, 2018 are ‘grandfathered’ or protected by the government. 

For example, you purchased a share for Rs.100 on 1st January 2017 and its price 31st January 2018 is Rs. 200. If you sell it on 1st April 2018 for Rs.250 then your gains will be taxed and here’s how you can calculate your gains:

Selling price – Cost of purchase or Cost on 31st January 2018 (higher of the two)

Since cost on 31st January is higher, for tax purposes your gains will be calculated like this: Rs.250 – Rs.200= Rs. 50.

What will be the impact of this tax?TAX ON LTCG

1. Earlier publicly listed companies were the only exception to the LTCG tax. While gains from other investments such as real estate, commodities, debt or even equity in private companies were taxed. With LTCG making a comeback all these investment options come at par with each other and ‘tax benefit’ will no longer be the ‘deciding criteria’ to select an investment option. 

2. People would switch to direct mutual fund plans rather than regular mutual funds plan. That’s because in a direct plan you can buy mutual fund units directly from the mutual fund company (usually their own website), whereas in a regular plan you buy through an advisor, broker or distributor (intermediary) and pay a commission to them. That’s why these plans would turn out to be more slightly more expensive than direct plans.

 

Our advice would be to consult professionals to help you build a portfolio and invest in direct plans.

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zankhanaManaged by MissManage Editorial

Written by Zankhana Shah

Zankhana Shah, Chartered Accountant by profession is the founder of Money Care Financial With over 2 decades of experience in financial advisory services, Zankhana’s writing has appeared in Hindustan Times, Financial Express, Economic Times and New Money, among others. In 2005, she was featured on the cover of Outlook Money.

1 thought on “Tax On LTCG And What It Means For You?”

  1. Pingback: Max Your Tax Game

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