LTCG tax: How should you react?

The Budget 2018 proposed to change how long term capital gains (LTCG) on equity shares and units of equity-oriented MFs are taxed in your hands. Till 31st March 2018 no LTCG will be chargeable. If you sell after 31st March 2018 the LTCG will be taxed as follows:

The cost of acquisition of the share or mutual fund unit bought before 1st February 2018 will be the higher of:

  1. The actual cost of acquisition of the asset
  2. The fair market value of this asset (highest price of share on stock exchange on 31st January 2018 or when share was last traded. NAV of unit in case of a mutual fund unit)

In other words there was a grandfathering clause wherein for all shares bought till 31st January 2018 for the purpose of calculating LTCG after 31st March 2018; we will take the higher of the price of actual purchase of the share & the highest price as on 31st January 2018.

LTCG will be taxed at 10% of profits exceeding Rs.1 lakh made for all listed equity shares where STT is paid on purchase and sale and for units of equity oriented MFs where STT is paid on the sale of these units. As STT is paid/deducted if you sell your equity MF units back to the MF or on the stock exchange the new LTCG regime would apply to these. This means that the LTCG tax regime would be unchanged for unlisted equity shares where STT is not paid on purchase or sale.

The fair market value of shares which were unlisted on 31st January, 2018 but listed on date of transfer shall be indexed cost of acquisition. This will also apply for unlisted shares which are substituted in tax neutral transfers (like amalgamation, demerger, gift, succession, etc) for shares which are listed on date of transfer.

LTCG upto Rs.1 lakh will be tax exempted every financial year. This is irrespective of your portfolio size & will be applicable only if you book profits (sell). Notional profits on your portfolio are not taxable. For example even if you have a portfolio of Rs.50 lakhs, in FY19 you sell stocks worth Rs.10 lakhs, on which you made a capital gain of Rs.80,000, it will not be taxable. Even if you made a capital gain of Rs.1,20,000, you will have to pay a tax of Rs.2000 ( 10% of Rs.20,000).  This will help small investors & with some planning help reduce tax burden to a great extent.

Indexation of the cost of acquisition will not be allowed. Therefore, LTCG will be determined by subtracting sale value from cost of acquisition as determined above, without any other consideration.

While the grandfathering clause has reduced the extent of LTCG applicable, it has complicated the calculations. Investors will now have to remember the price of the stocks/NAV of mutual funds as on 31st January 2018 to compute LTCG. You can either maintain this data on an excel sheet or sign up for a free portfolio tracker online.

Now let us look at the different scenarios with some live examples:

Suppose you bought ITC Ltd on 4th January 2010 at Rs.84.54/sh.  The highest value of ITC Ltd on 31st January 2018 was Rs.276/sh. In this case due to grandfathering clause your purchase price becomes Rs.276/sh. Thus selling the shares now below that price will not make sense.

Sell dateSelling price (Rs.)

( actual or assumed)

5th March 2018260.25No tax before 31st March 2016
4th May 2018250No tax
30010% LTCG on Rs.24/sh

 Suppose you bought ITC Ltd on 14th July 2017 at Rs.337.15/sh.  The highest value of ITC on 31st January 2018 was Rs.276. For purpose of LTCG cost price will be Rs.337.15/sh (higher than the 31st January 2018 price of Rs.276/sh)

Sell dateSelling price (Rs.)

( actual or assumed)

5th March 2018260.25No tax (STCG)
4th May 2018300No tax (STCG)
35015% STCG on Rs.12.75/sh
10th August 2018250No tax ( LTCG)
300No tax ( LTCG)
35010% LTCG on Rs.12.75/sh

Suppose you bought ITC Ltd on 20th February 2018 at Rs.262.80/sh.  For purpose of LTCG cost price will be Rs.262.80/sh only.

Sell dateSelling price (Rs.)

( actual or assumed)

5th March 2018260.25No tax (STCG)
12th March 2018270.00STCG applicable on Rs.7.20/sh
10th August 2018250No tax (STCG)
300STCG on Rs.37.20/sh
10th May 2019250No tax ( LTCG)
30010% LTCG on Rs.37.20/sh

Suppose you bought Ashok Leyland on 1st December 2016 at Rs.77.65/sh. The highest value on 31st January 2018 was Rs.126.30/sh. Price on 13th March is Rs.150/sh. For LTCG calculation cost price becomes Rs.126.30.

Since LTCG will be applicable from 1st April 2018 it makes sense to book profits in stocks which are higher than 31st January levels. But you should do so only in case gains are substantial since LTCG will be applicable only on gains above Rs.1 lakh p.a.

Sell dateSelling price (Rs.)

( actual or assumed)

13th March 2018150.00No tax (LTCG)
10th August 2018120No tax (LTCG)
18010% LTCG on Rs.53.70/sh

Now it may make sense to book profits in Ashok Leyland Ltd on 13th March 2018 & again buyback at the same price. Thus your new purchase price becomes Rs.150/sh. This can be done only if you intend to keep the stock for long term holding as after this selling the stock any time before 13th March 2019 will attract 15% short term capital gains.

Sell dateSelling price (Rs.)

( actual or assumed)

10th August 2018120No tax (STCG)
180STCG on Rs.30/sh
10th May 2019120No tax ( LTCG)
18010% LTCG on Rs.30/sh

 Let us have a look at a list of BSE 200 companies which are higher by 10% from 31st January 2018 levels.

Company NameReturns (%)*Company NameReturns (%)*
Ashok Leyland Ltd.19.09IDBI Bank Ltd.11.02
City Union Bank Ltd.15.19Castrol India Ltd.10.79
Avenue Supermarts Ltd.13.40Indiabulls Ventures Ltd.10.06
Cholamandalam Investment & Finance Company Ltd.12.16

*Returns as on 13th March 2018

If there are stocks which you have held for long are trading significantly below their purchase price irrespective of the price as on 31st January 2018. You should hold onto the stock till 1st April 2018 & if required book your losses. The long term capital loss that you book from next financial year can be set off against any other long term capital gains you make on any other stocks or mutual funds.

Suppose you bought GMR Infrastructure Ltd on 29th May 2009 at Rs.80.75/sh. The highest price on 31st January was Rs.22.45/sh. The cost price for LTCG purpose will be Rs.80.75/sh.

Sell dateSelling price (Rs.)

( actual or assumed)

5th March 201818.50LTCL (loss) not allowed to be set off.
4th May 201815LTCL(loss) Rs.65.75/sh which can be set-off against other LTCG
25LTCL(loss) Rs.55.75/sh which can be set-off against other LTCG

Thus to sum up for LTCG point of view if currently stock price is below 31st January 2018 levels, no action is required. If prices are higher till 31st March 2018 you may sell & buy to increase your purchase price if profits are significantly higher. Lastly if you want to book your losses on a stock which has declined substantially it is better to do it after 1st April 2018 for reasons stated above.

In line with GST (for indirect taxes) there is a proposal to bring in a direct tax code (DTC) for direct taxes. This is a single code for all direct taxes. Under DTC, income from all sources, including capital gains from stocks could be taxed under a single head. If implemented the current LTCG provisions will no longer be applicable. Thus all these calculations may again become redundant in 2 years’ time if possibly DTC were to be implemented from FY2020.

Budget 2018-19 expectations- LTCG on equity investments

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

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