In the Indian tax legislation, as per Section 10 (38), long-term capital gains (LTCG) from the sale of equities or equity-oriented funds were exempt from taxation. These are the funds on which the Securities Transaction Tax has been paid. The Union Budget 2018 proposed to remove this section.
As per this section, investors need to pay short-term capital gains (STCG) @15% on selling equities or equity-oriented fund units on which STT (Securities Transaction Tax) is paid.
Union Budget 2018: LTCG made a comeback
Taxation on LTCG Section 112A, Income Tax Act 1961 was introduced by withdrawing Section 10(38) for the tax treatment of LTCGs. The reintroduction of LTCG was the biggest announcement in the Union Budget 2018-19 and the comeback of LTCG.
What is the Current Provision of LTCG?
As per the current laws, investors need to pay taxes on profits made by selling stocks in their demat account, even if the holding period is more than a year. However, it is lower than that of STCG. LTCGs exceeding Rs.1 lakh a year are taxed at 10%, and there will be no indexation benefit. You can open demat account with a discount broker to hold your investment for the long term and maximise your returns with tax benefits.
This tax treatment is applicable on the transfer of:
Equity Mutual Funds
Business trusts, i.e., REIT (Real-estate Investment Trust) and InvIT (Infrastructure Investment Trust)
Long-term investors prefer to open demat accounts with discount brokers for cost-efficient investing. Their demat account charges are lower than full-service brokerage firms.
What is Indexation Benefit?
Indexation means adjusting the gains against inflation to decrease the real quantum of gains. The cost of investment is inflated for inflation over the investment period, and thus, it helps in tax savings.
The Concept of Grandfathering
Investors had partial relief as the government provided grandfather benefits on all gains made up to January 31, 2018. The gains were to be calculated based on the price as on January 31. The concept of this process i.e grandfathering means individuals may be relieved from complying with the new clause with the introduction of a new clause added to the law. “Grandfathered” individuals are given the right to avail of that relieved condition. LTCG on the sale of bonus and rights stocks where the acquisition date is before January 31, 2018, the fair market value on January 31, 2018, will be used for LTCG calculation.
Please check the below for better understanding the LTCG implications in different scenarios
Both purchase and sale before 31st Jan, 2018
Exempted under Section 10(38)
Purchased before 31st Jan, 2018, and sold after 31st Jan, 2018 but before April 1, 2018.
Exempted under Section 10(38)
Bought before 31st Jan, 2018 and sold on or after April 1, 2018
LTCG taxes are applicable but gains accrued before January 31, 2018 were exempted.
Bought after 31st Jan, 2018 and sold on or after April 1, 2018
LTCG taxes are applicable.
Understand LTCG taxes on listed and unlisted shares
Listed shares on public stock exchanges, like the Bombay Stock Exchange (BSE), are subject to capital gains tax.
If the holding period of your listed stocks is more than 12 months, the gains from their transfer are categorized as LTCG and taxed at @10%.
If the holding period is less than 12 months, there will be a short-term capital gain (STCG) and taxed as per the applicable slab rate to the individual.
Tax calculations differ from unlisted equity shares than listed shares. Unlisted stocks are not listed on public stock exchanges and, therefore, cannot be traded on stock exchanges. They are bought/sold on the over the counter (OTC) market with the help of market makers/dealers.
If the unlisted shares are sold within 2 years, it will attract short-term capital gain. If the unlisted stocks are traded after 2 years of acquisition, these will be long-term investments.
LTCGs are taxed @ 20% after indexation under Section 112.
STCGs are taxed as per the tax slab the investor falls in.
Thus, the LTCG comeback impacted investors when selling their securities, and taxes are a function of the new tax rate. By considering tax treatment, you can decide on your investment period to save on taxes.