Investing in new LTCG tax regime not that taxing

One of the major announcements of the Budget 2018, which had a ripple effect on the stock markets, was the removal of exemption from long-term capital gains (LTCG) on the sale of listed equity shares and equity oriented mutual funds, which are held for more than 12 months.

This according to the finance minister Arun Jaitley has led to significant erosion in the tax base resulting in revenue loss. As announced by the finance minister in his budget speech, the total amount of exempted capital gains from listed shares and units is around Rs 3,67,000 crores as per returns filed for Assessment Year 2017-18.

The Budget 2018 proposes to withdraw the aforesaid exemption under section 10(38) and to introduce a new tax regime from Financial year 2018-19, to provide that LTCGs arising from transfer of a long-term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust shall be taxed at 10% of such capital gains exceeding Rs 1 lakh. The introduction of this new LTCG tax necessitates a review of one's investment portfolio and strategy. Here are some important aspects that one should consider while investing or stay invested for the long term in equities and mutual funds.

1. LTCG to be computed without indexation benefit

The LTCG will be computed by deducting the cost of acquisition from the full value of consideration on transfer of the long-term capital asset. The LTCG will be computed without indexation in respect of the cost of acquisition and cost of the improvement if any, and the benefit of computation of capital gains in foreign currency in the case of a non-resident, will not be allowed. The benefit of indexation not being available should be factored into your investment exit decision as this may have capital gains tax implication.

2. Partial relief of appreciation provided for notional gains up to January 31, 2018, by way of grandfathering provisions

Certain relief is provided in respect of grandfathering of long-term capital gains up to January 31, 2018, and gains after that period shall be taxable under the new rate of 10%. In other words, the cost of acquisitions in respect of the long-term capital asset acquired by the assessee before one day of February 2018, shall be deemed to be the higher of –

a. the actual cost of acquisition of such asset; and

b. the lower of –

i. the fair market value of such asset; and

ii. the full value of the consideration received or receivable on the transfer of the capital asset.

As the fair market value on January 31, 2018, will be taken as the cost of acquisition, the gains accrued up to 31 January 2018 in most cases will continue to be exempt.

It is pertinent to note that the grandfathering benefit would not be available under the MAT regime and would continue to be taxed as per applicable rates on the book profits based on the provisions of Section 115JB of the IT Act.

3.0 Tax treatment of transfer of share or unit between February 1 to March 31

As mentioned above, the new tax regime will be applicable in case of the sale made on or after April 1, 2018. As such, any capital gains on sale made during the course of this financial year 2017-18 i.e. before March 31, 2018, shall be eligible for exemption under section 10(38) of the Income-tax Act. An informed decision on sale can be made by the taxpayer, in cases where the gains during the intermediary period between February 1 and March 31 is more than the Fair Market Value (FMV) as at January 31, 2018.

It is pertinent to note that though the gains accruing up to 31 January 2018 have been grandfathered, gains accrued during the period 1 February 2018 to 31 March 2018 shall be taxable if the shares or unit are transferred after 31 March 2018.

4. How to determine the Fair Market value (FMV)?

In case of a listed equity share or unit, the FMV 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 31 January 2018, the FMV will be the highest price quoted on a date immediately preceding 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 FMV.

5.Tax deduction at source on LTCG

The CBDT wide its circular dated February 4, 2018, has clarified that there will be no deduction of tax at source from the payment of LTCG to a resident taxpayer. However, in case of non-residents taxpayer (other than a Foreign Institutional Investor), the tax will be deducted at the rate of 10% in terms of the provisions of section 195 from payment of LTCG.

6. Long Term capital loss can be set off and carried forward

Currently, since the LTCGs on equities and equity oriented mutual funds are exempt from tax, the long-term capital losses incurred on such securities are not allowed to be set off or carried forward. In the new tax regime, long-term capital loss arising from the transfer of such securities made on or after April 1, 2018, will be allowed to be set-off against any other long-term capital gains and the unabsorbed loss can be carried forward to subsequent eight years for set-off against long-term capital gains. In view of the above, those investors who have incurred losses on long-term shares or units and are still holding such investments may continue to hold them and sell the same after 31 March 2018. Such losses shall be allowed to be set off and carried forward.

The difference between the short-term capital gains tax i.e. 15% (plus applicable surcharge and cess) and long-term capital gains tax on equities and mutual funds traded through a stock exchange is now only of 5%. The investors shall now be less motivated to keep invested for the longer term.

NEW AVENUE

• The LTCG will be computed by deducting the cost of acquisition from the full value of consideration on transfer of the long-term capital asset.
   
• In case of a listed equity share or unit, the FMV means the highest price of such share or unit quoted on a recognized stock exchange on January 31, 2018.

The writer is founder of RSM Astute Consulting