Now, the income from the long-term investment into shares is not tax-free. In the Budget 2018, the government has introduced the long-term capital gains tax on equity (shares) and equity mutual fund. The new rules are applicable from 1st April 2018.
The government would earn 20,000 crore rupees in 2018-19 because of this change. However, in the future, the government would earn a higher amount. In the financial year 206-17, People did not pay any tax on long-term capital gains of ₹3,67,000 Crore. Now, you can estimate the potential of this tax.
Recommended: What is Capital Gains Tax? Long Term Vs Short Term
7 Main Points of Long-Term Capital Gains Tax on Shares
Following are the main provisions of this rule.
1. 10% Tax Rate
The government would charge 10% tax on the long-term capital gains. There is 15% tax on short-term capital gains.
2. Threshold of 1 Lakh
This tax would be applicable if long-term capital gains exceed 1 lakh rupees in a financial year. The government would charge tax on the gain above and over the 1 lakh. So every year, Long Term capital gain up to ₹1 lakh is tax-free to everyone.
3. Also Applicable to Equity mutual fund
This tax is applicable to equity and equity mutual fund both. A mutual fund which has invested 65% of its amount into shares would be recognised as equity mutual fund.
4. No Indexation Benefit
Unlike bond and debt mutual funds, there would not be the benefit of indexation. Often it reduces the tax liability well below the 10%. However, indexation is applicable when the tax rate is 20%. In case of bond and debt as well, without indexation tax rate is 10%.
5. 10% Tax on Mutual Fund Dividend
Along with the capital gains, there would be 10% tax on dividend of the equity mutual fund. It was necessary as mutual fund schemes distribute profit in the form of the dividend. So the investor might switch the dividend plans. For the tax on dividend, there is no minimum amount limit. This rule is just like a closure notice to the dividend plan of equity mutual funds.
6. Applicable From 1st April 2018
This tax is applicable to the sale which takes place after 1st April 2018. If you sell your share or mutual fund units before 1st April 2018, the long-term capital gains tax would not be applicable.
7. The Gain Would be Counted From 1st Feb 2018
As I have told any sale of the share or mutual fund after the 1st April 2018 would be considered for the Long Term capital gains. But it does not mean that all of your profit would be taxed. Rather, the profit earned after 31st January would be considered for the taxation.
GrandFathering Clause (With Example)
Although the government has levied the tax on the long-term gain of the shares, you should not worry about the earlier gains. Any gains before the 1 February 2018 would not be counted for the tax. This waiver of previous gains from the new rules is called as the grandfathering. Let us understand it by an example.
Suppose, Anil has bought 100 shares of Abc Ltd at the price of ₹200/share in 2014. On 31st January 2018, the price of ABC Ltd was ₹500/share. Thus Anil has the Long Term capital gains of ₹300/share. But he did not sell this share and keep it up to March 2019. He sells the share at ₹600/share.
So on which gain the tax would be computed, whether it be ₹400/share?
No, You have to give tax on the price difference between selling price and Stock price on 31st January 2018. Hence, for the tax calculation, capital gain would be the only ₹100/share.
Ways To Save Long-Term Capital Gains Tax on Shares
There are 3 ways to escape Long Term capital gains on shares if you need it.
Sell Shares or MF units before 1st April
The Long Term capital gains on shares are applicable since April 2018. If you sell your shares until 31st March 2018, the long-term capital gains would not be applicable to you. However, you would rarely require this method because of following reasons.
- There would not be LTCG for the profit earned before 1st February. Hence, you would be saving tax on the gains of only two months.
- For most of the people, the gain of two months would be far less than 1 lakh. Hence, they should not worry about this tax.
You should adopt this way only if the gain in last two months is substantial and you expect that in the year 2018-19, your capital gains may cross 1 lakh.
Keep Long Term Gains Within Limit
The long-term gains tax on the share would be charged on the gain over and above Rs 1 Lakh. In fact, you can earn upto 1 lakh/year in Long Term gains, tax-free. So, If you plan well, you can avoid this tax. Defer the unnecessary sale of share and mutual fund units for the next year.
Set of the Loss
You can also set off the Long Term capital loss with the gains. You can set off the loss from equity or equity mutual fund with the gains from equity or equity mutual fund.
Thus, if you have any dud investment which is making a loss, use it for the set-off. You can use the money to buy a better share or you can buy the same share after few days.
Even, you would be able to carry forward the long-term capital loss to save future taxes.
Note, you would not be able to set-off a loss which arose before 31st Jan 2018.
Calculation of Long Term Capital Gains Tax on Shares
For Fresh Investment
The calculation of Long Term capital gain tax goes through the following steps. This is a normal calculation for the fresh investment since 1st April 2018.
- In a financial year, you may sell many share or equity mutual fund. Among those, shortlist those proceeds which were held at least for a year.
- Subtract the purchase price from the sale price of each share or MF units. It would give Long Term capital gains or loss on each investment. Club all the gains or loss together and get the net capital gains.
- From the net capital gains reduce 1 lakh rupees. As there is no tax on first 1 lakh rupee of the Long Term capital gains.
- Now calculate the 10% amount of the resultant gain. Add the applicable cess to know the final payable capital gains tax
Also Read: Mutual Fund Tax Benefit Guide and Latest Rates
For Old Investment
To calculate Long Term capital gains tax which was invested before 1 Feb 2018, Following points should be noted.
- There would not be any long-term capital gains tax if you sell a share or mutual fund units until 31st March 2018.
- If you sell shares after 31st March 2018, the Gain would be counted from the 31st January 2018. So, you need to know the market value of share or mutual fund units on 31st Jan 2018. The share price or NAV on 31st January would be subtracted from the sale price to get the capital gains.
- If you are at a loss on 31st Jan 2018, your purchase price would be considered for capital gains calculation. You can subtract your purchase price from the sale price to know the capital gains.
- After finding out the capital gains, calculate the tax at the rate of 10%.
In this post, I have given you the explanation of Long Term capital gains tax on Shares and equity mutual fund. I have also written about the capital gains tax on property. You can also learn about that. Meanwhile, there is a change in income tax rate in budget 2018. You should also know the new rules of income tax.