Feb 08, 2018 06:04 PM IST | Source:

Long term capital gains to become taxable from April 1, 2018

Effective 1 April 2018, long term capital gains arising from transfer of listed equity shares exceeding Rs. 1 lakh will be taxable at 10 percent

  Saraswathi Kasturirangan & Srividya

The Finance Minister has presented Budget 2018-19. One of the major proposals introduced is to tax the long term capital gains arising on transfer of listed equity shares or units of equity-oriented fund (commonly referred to as listed equity shares in the article).

The Finance Minister indicated that the new proposal is brought in as the current provision is inherently biased against manufacturing sector and has encouraged diversion of investment in financial assets. It has also led to significant erosion in the tax base resulting in revenue loss. The total amount of exempted capital gains from listed shares is around Rs. 3,67,000 crores as per the latest returns filed. Major part of this gain has accrued to corporates and LLPs. Hence the need for the new proposal.

A listed equity share will be considered to be a long term capital asset if the same is held for more than 12 months immediately preceding the date of transfer. Gains arising from transfer of such long term asset will be considered as long term capital gains. Currently, gains arising from transfer of such long term listed equity share is exempt from tax. Also, losses are not to be carried forward.

Effective 1 April 2018, long term capital gains arising from transfer of listed equity shares exceeding Rs. 1 lakh will be taxable at 10 percent. A new section has been introduced to provide for the same. The said section also provides that –
  • Securities Transaction Tax should have been paid on such listed shares
  • Indexation benefit (where the cost of acquisition and improvement is adjusted in line with the inflation) would not be available
  • Method of determining the cost of acquisition for the shares purchased before 1 February 2018 has been provided. This will ensure that the exemption for the gains available for increase in value of shares until 31 January 2018 is grandfathered.
  • Chapter VIA deductions (like 80C, 80D, etc.) shall not be available for the said income and rebate on tax payable less tax payable on such capital gains.
In a nutshell, the difference between the taxability of long term capital gains from transfer of listed equity shares as per the current provisions and Budget proposal is as below:
Particulars Current provision Impact of budget proposal
Gains up to Rs. 100,000 Not taxable - exempt Not taxable - exempt
Gains from Rs. 100,001 and above Not taxable - exempt Taxable at 10%
Loss of any amount No effect; cannot be carried forward Can be carried forward for set off against long term gains in future years

As the above provisions are applicable from 1 April 2018, this effectively means that the exemption from tax for the long term capital gains arising on transfer of long term equity listed shares would continue to be available until 31 March 2018. However, in case of loss, there will be no provision to carry forward the loss if the transaction occurs on or before 31 March 2018.

With the proposal of taxing long term capital gains, the Finance Minister expects that the tax base erosion will be arrested. At the same time, interests of small value investors are also protected by introducing the threshold of Rs. 1 lakh. Hence this is a shot in the right direction.

Authors Saraswathi Kasturirangan is a Partner, Deloitte India and Srividya is Senior Manager, Deloitte Haskins and Sells LLP

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