The new LTCG tax
The one Budget announcement that created a lot flutter is the reintroduction of long-term capital gains (LTCG) tax on equity investments. And not everyone is full aware of what exactly it means for their investments. Here a son explains to his father everything he needs to know about the LTCG tax.
Gains up Rs 1 lakh a year are tax-free
The father thinks that all the gains he has made in equity will now be taxed. The son tells him that is not the case: “Not entirely, papa. Gains of up to Rs 1 lakh in a year are tax free. Only gains above that limit will be taxed.” He went to explain:
*Suppose you invest Rs 2 lakh in stocks or equity funds in February 2018.
*You sell the investment for Rs 2.75 lakh in March 2019.
*Up to Rs 1 lakh LTCG are tax free so the gains of Rs 75,000 will not be taxed.
What is grandfathering?
The father was flummoxed. “Huh? What has your grandfather got to do with this? Don’t drag him into this mess!” he exclaimed. The son then explained what the meaning of grandfathering. “Grandfathering is a legal provision. Here it will mean that LTCG made up till 31 January will not be affected. Only the gains made after that date will be taxed.” Here is the example he gave:
*Suppose you invested Rs 2 lakh in stocks or equity funds in March 2016.
*On 31 Jan 2018, the value of the investment was Rs 4 lakh.
*You sell the investment for Rs 5.2 lakh after 31 March 2018.
*LTCG will be calculated using the 31 Jan 2018 price. So the gains will be only Rs 1.2 lakh.
*Of this, Rs 1 lakh will be tax free in a year and only Rs 20,000 will be taxed at 10%.
When will the new rule come into effect?
“Yes, the new rule will come into effect from 1 April 2018. If you sell your stocks and equity funds by 31 March, LTCG will be exempt from tax,” said the son. The father then asked: “This means I should sell off all my shares by 31 March to gain from the existing tax exemption for LTCG.” “Well, the gains you made are already tax-free. Remember, there is no tax on gains made till 31 Jan 2018. Only gain made after 31 Jan 2018 will be taxed. Markets have receded, so your stocks would not have gained. In fact, wait till 1 April when you can also book losses,” his son explained to him.
Setting off losses
“If you sell after 31 March, you can also book your long-term losses. Till now, there was no benefit if you incurred losses on stocks and equity funds held for over a year. But under the new rules, that will be allowed,” he informed him. Here is a closer look at what this means:
*Suppose you invested Rs 2 lakh in stocks or equity funds in Sept 2016.
*On 31 Jan 2018, the value of the investment was Rs 1 lakh.
*If you sell now, the loss of Rs 1 lakh will have to be absorbed.
*But if you sell on or after 1 April, the loss of Rs 1 lakh can be adjusted against other long-term gains.
*If you make Rs 2 lakh LTCG in the next financial year, you won’t have to pay any tax. Rs 1 lakh will be tax free while Rs 1 lakh can be adjusted against the Rs 1 lakh loss.
*Unadjusted losses can be carried forward and set off against gains for up to eight financial years.
Benefiting from a loss
Yes, if you sell after 31 March. The loss you have incurred can be adjusted not only against long-term gains from stocks and equity funds but also debt funds, gold and property. Your losses from stock investments can now bring down your tax.
Do you get indexation benefit?
No, unfortunately the indexation benefit is not available to stock and equity fund investors.
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