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LTCG Tax: No inflation indexation, no TDS; Here’s CBDT's detailed explainer on how the tax will be calculated

Under the existing regime, long-term capital gains (LTCG) arising from the transfer of long-term capital assets, such as equity shares or unit of equity oriented fund or a unit of business trust, is exempt from Income-Tax.

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The Union Budget 2018 has said that long-term capital gains exceeding one lakh rupees from the sale of shares or equity-oriented funds will be taxed at 10 percent from April 1, 2018.

Under the existing regime, long-term capital gains (LTCG) arising from transfer of long-term capital assets, such as equity shares or unit of equity oriented fund or a unit of business trust, is exempt from Income-Tax.

However, transactions in such long-term capital assets are liable to securities transaction tax (STT).

“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 the abusive use of tax arbitrage opportunities created by these exemptions,” the CBDT has mentioned in a set of questions explaining the LTCG.

The CBDT has clarified on some of the concerns raised by investing community in a set of FAQs:

What is the meaning of long-term capital gains under the new tax regime for long-term capital gains?

Long-term capital gains mean gains arising from the transfer of a long-term capital asset. The Finance Bill, 2018 proposes to provide for a new long-term capital gains tax regime for the following assets –  equity shares in a company listed on a recognised stock exchange; unit of an equity oriented fund and Unit of a business trust. The proposed regime applies to the above assets, if the assets are held for a minimum period of 12 months from the date of acquisition and Securities Transaction Tax (STT) is paid at the time of transfer. However, in the case of equity shares acquired after October 1, 2004, STT is required to be paid even at the time of acquisition.

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.

What is the method for calculation of long-term capital gains?

LTCG 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 31st January 2018?

The cost of acquisition for the LTCG acquired on or before January 31, 2018 will be the actual cost. However, if the actual cost is less than the fair market value of such asset as on 31st of January, 2018, the fair market value will be deemed to be the cost of acquisition. Further, if the full value of consideration on transfer 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.

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 31st of January, 2018. However, if there is no trading on 31st January, 2018, the fair market value will be the highest price quoted on a date immediately preceding 31st of January, 2018, on which it has been traded. In the case of an unlisted unit, the net asset value of such unit on 31st of January, 2018 will be the fair market value.

Whether the cost of acquisition will be inflation-indexed?

The long-term capital gains will be computed without giving effect to the provisions of the second provisos of section 48. Accordingly, it is clarified that the benefit of inflation indexation of the cost of acquisition would not 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 1st April, 2018. The existing regime providing exemption under clause (38) of section 10 of the Act will continue to be available for transfer made on or before 31st March, 2018.

What will be the tax treatment of accrued gains upto 31st January 2018?

As the fair market value on 31st January, 2018 will be taken as cost of acquisition, the gains accrued upto 31st January, 2018 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?

Since the regime will be applicable to transfer made on or after 1st April, 2018, the transfer made between 1st February, 2018 and 31st March, 2018 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 1st April 2018?

The long-term capital gains exceeding Rs 1 Lakh arising from transfer of these asset made on after 1st April, 2018 will be taxed at 10 per cent. However, there will be no tax on gains accrued upto 31st January, 2018.

What is the date from which the holding period will be counted?

The holding period will be counted from the date of acquisition.

Whether tax will be deducted at source in case of gains by resident tax payer?

There will be no deduction of tax at source from the payment of long-term capital gains to a resident tax payer.

Whether tax will 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 as per 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 per cent 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

Whether tax will 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 treatment of the gains accrued up to 31st January 2018 in the case of FIIs?

In case of FIIs also, there will be no tax on gains accrued up to 31st January, 2018.

What will be the tax treatment of transfer of share or unit between 1st February 2018 and 31st March 2018 in the case of FIIs?

In case of FIIs, the transfer made between 1st February, 2018 and 31st March, 2018 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 1st April 2018 in case of FIIs?

In case of FIIs also, the long-term capital gains exceeding Rs 1 Lakh arising from transfer of these asset made on after 1st April, 2018 will be taxed at 10 per cent. However, there will be no tax on gains accrued up to 31st January, 2018 as explained in Ans 10.

What will be the cost of acquisition in the case of bonus shares acquired before 1st February 2018?

The cost of acquisition of bonus shares acquired before 31st January, 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 31st January, 2018 will be taken as cost of acquisition, and hence, the gains accrued up to 31st January, 2018 will continue to be exempt.

What will be the cost of acquisition in the case of right share acquired before 1st February 2018?

The cost of acquisition of right share acquired before 31st January, 2018 will be determined as per sub-clause (6) of clause 31 of the Finance Bill, 2018. Therefore, the fair market value of right share as on 31st January, 2018 will be taken as cost of acquisition, and hence, the gains accrued up to 31st January, 2018 will continue to be exempt.

What will be the treatment of long-term capital loss arising from transfer made on or after 1st April, 2018?

Long-term capital loss arising from transfer made on or after 1st April, 2018 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.

India Union Budget 2018: What does Finance Minister Arun Jaitley have up his sleeve? Click here for live Budget 2018 news, views and analyses.
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