After Finance Minister Arun Jaitley proposed to tax long term capital gains in his Budget speech last week, several queries have been raised about it on different forums. Some wondered what would happen to the exemption under Clause 38 of Section 10 in the Income Tax Act. 1961. In response, Pravin Rawal, Director of the Central Board of Direct Taxes yesterday released an FAQ addressing all such queries. Here is a simplified version of the same:
What is the meaning of long term capital gains under the new tax regime for long term capital gains?
Long term capital gains or LTCG mean gains arising from the transfer of a long-term capital asset. The Finance Bill, 2018 proposes to provide for a new LTCG tax regime for the following assets:
Under the existing regime, long term capital gains arising from transfer of long term capital assets (mentioned above) is exempt from income tax under Clause (38) of Section 10 of the Act. However, transactions in such long-term capital assets are liable to securities transaction tax (STT). Consequently, this regime is inherently biased against manufacturing and has encouraged diversion of investment to financial assets. It has also led to significant erosion in the tax base, resulting in revenue loss. The problem has been further compounded by abusive use of tax arbitrage opportunities created by these exemptions. Hence, in order to address these concerns, the finance minister proposed to withdraw the existing exemption and introduce the new Section 112A.
What are the modes of acquisition of equity shares which are proposed to be exempted from the condition of paying STT?
The Central Government had exempted certain modes of acquisition of equity shares for the purposes of Clause (38) of Section 10 of the Act through a notification on June 5, 2017. [To remind you, this had included employee stock options, acquisition of equity shares by venture capital or investment funds, FDI by NRIs etc.]
This notification is proposed to be reiterated for the purposes of Clause 31 of the Finance Bill, 2018 after its enactment.
What is the point of chargeability of the tax?
The tax will be levied only upon transfer of the long-term capital asset on or after April 1, 2018, as defined in Clause (47) of Section 2 of the Act.
In other words, if you sell all your shares or equity mutual fund units held for over a year on or before the last day of this fiscal, you can still claim tax exemption on long-term capital gains.
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 January 31, 2018?
The cost of acquisition will generally be the actual cost. However, if the actual cost is less than the fair market value of such asset as on January 31, 2018, the fair market value will be deemed to be the cost of acquisition. Further, if the full value of consideration on transfer-or the selling price in layman's lingo-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. Illustrative examples to follow.
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 January 31, 2018. However, if there is no trading on that day, the fair market value will be the highest price quoted on the date immediately preceeding January 31, 2018, on which it has been traded.
In the case of an unlisted unit, the net asset value of such unit on January 31, 2018 will be the fair market value.
Can you provide illustrations for computing long-term capital gains in different scenarios, in the light of the above?
Scenario 1: Let's say an equity share is acquired on January 1, 2017 at Rs 100. Its fair market value is Rs 200 on January 31, 2018 and it is sold on April 1, 2018 at Rs 250. As the actual cost of acquisition is less than the fair market value, the latter (Rs 200) will be taken as the cost of acquisition and the long-term capital gain will be Rs 50 [selling price minus cost of acquisition].
Scenario 2: If an equity share is acquired on January 1, 2017 at Rs 100 and its fair market value is Rs 200 on January 31, 2018 but it is sold on April 1, 2018 at Rs 150. In this case, the fair market value is not only higher than the actual cost of acquisition but it is also higher than the sale value. Accordingly the sale value of Rs 150 will be taken as the cost of acquisition, too, and the long-term capital gain will be NIL (Rs 150 minus Rs 150).
Scenario 3: Assume an equity share is acquired on January 1, 2017 at Rs 100 but its fair market value is lower at Rs 50 on January 31, 2018 and it is then sold on April 1, 2018 at Rs 150. In this case, since the actual cost of acquisition is higher than the fair market value, this will be the value used for calculating long-term capital gains. Hence, the taxable amount in this example is Rs 50 [selling price minus cost of acquisition].
Scenario 4: Let's assume an equity share is acquired on January 1, 2017 at Rs 100 and its fair market value is Rs 200 on January 31, 2018 but it is sold at a loss on April 1, 2018, say at Rs 50. Here, the sale value is less than the fair market value as well as the actual cost of acquisition. Therefore, the purchasing price of Rs 100 will be taken as the cost of acquisition and the long-term capital loss will be Rs 50 (Rs 50 - Rs 100).
Will the cost of acquisition be inflation indexed?
Sub-clause (5) of Clause 31 of the Finance Bill, 2018, inter alia, provides that the long-term capital gain will be computed without giving effect to the provisions of the second provisos of Section 48. Accordingly, the benefit of inflation indexation of the cost of acquisition won't 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 April 1, 2018.
What will be the tax treatment of accrued gains up to January 31, 2018?
As the fair market value on January 31, 2018 will be taken as cost of acquisition (except in some typical situations explained above), the gains accrued up to end January will continue to be exempt.
What will be the tax treatment of transfer of share or unit between February 1, 2018, and March 31, 2018?
As explained above, the new tax regime will be applicable to transfer made on or after April 1, 2018, so the transfers made between these dates 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 April 1, 2018?
The long-term capital gains exceeding Rs 1 lakh arising from transfer of above-mentioned assets made on after April 1, 2018 will be taxed at 10%. However, there will be no tax on gains accrued up to January 31, 2018 (see illustrative examples above).
What is the date from which the holding period will be counted?
The holding period will be counted from the date of acquisition.
Will tax 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.
Will tax be deducted at source in case of payment of long-term capital gains by non-resident tax payer (other than a Foreign Institutional Investor)?
Ordinarily, under Section 195 of the Act, tax is required to be deducted on payments made to non-residents, at the rates prescribed in Part II of the First Schedule to the Finance Act. The rate of deduction in the case of capital gains is also provided therein. In terms of the said provisions, tax at the rate of 10% will be deducted from payment of long-term capital gains to a non-resident tax payer (other than a Foreign Institutional Investor). The capital gains will be required to be computed in accordance with Clause 31 of the Finance Bill, 2018.
Will tax be deducted at source in case of payment of long-term capital gains by Foreign Institutional Investors (FIIs)?
No. There will be no deduction of tax at source from payment of long-term capital gains to a Foreign Institutional Investor in view of the provisions of sub-section (2) of Section 196D of the Act.
How will the gains in the case of FIIs be determined?
The long-term capital gains in case of FIIs will be determined in the same manner as explained in earlier answers in the case of resident tax payers.
What will be the cost of acquisition in the case of bonus shares acquired before February 1, 2018?
The cost of acquisition of bonus shares acquired before January 31, 2018 will be determined as per Sub-clause (6) of Clause 31 of the Finance Bill, 2018. Therefore, the fair market value of the bonus shares as on above date will be taken as cost of acquisition (except in some typical situations explained above), and hence, the gains accrued up to end January will continue to be exempt.
What will be the cost of acquisition in the case of right share acquired before February 1, 2018?
Same as above
What will be the treatment of long-term capital loss arising from transfer made between February 1, 2018 and March 31, 2018?
As the exemption from long-term capital gains under Clause (38) of Section 10 will be available for transfer made between these dates, the long-term capital loss arising during this period will not be allowed to be setoff or carried forward.
What will be the treatment of long-term capital loss arising from transfer made on or after April 1, 2018?
Long-term capital loss arising from transfer made on or after this date 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.
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