#Inside the budget 2018_Long Term Capital Gains

INSIDE THE BUDGET-
LONG TERM CAPITAL GAINS
(A COMPREHENSIVE STUDY)
RJSP & ASSOCIATES
CHARTERED ACCOUNTANTS
FCA Ruchika Jain
ruchika@rjspassociates.com
+91 - 98 11 55 3406
C-123, II Floor, Preet Vihar, Delhi – 110092
+ 91 - 49 40 6882

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INSIDE THE BUDGET – LONG TERM CAPITAL GAINS RJSP & Associates
LONG TERM CAPITAL GAINS - AN OVERVIEW OF PRE-BUDGET SCENARIO
The long-term capital gains arising on transfer (sale) of following long term capital assets are exempt
(i.e., not chargeable to tax) u/s 10(38) of Income Tax Act, 1961:
1. Equity shares listed on a recognised stock exchange
2. Units of equity oriented mutual funds, and
3. Units of a business trust
The above assets are considered to be long term capital assets, if they are held for a period of more than
12 months. The exemption from such long term capital gains is subject to the condition that STT has been
paid on the sale transaction.
Whereas, the short-term capital gains arising on the above assets (i.e., if held for a period not more than
12 months) are chargeable to tax @ 15% under sec 111A.
The long-term capital gains on the said above assets were made tax-free in 2004 and Securities transaction
tax (STT) was brought in w.e.f. 1st October, 2004.
FCA Ruchika Jain

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LONG TERM CAPITAL GAINS – AMENDMENT BROUGHT IN LAST YEAR BY FINANCE ACT, 2017
It was brought to the knowledge of departmental authorities that exemption provided under section
10(38) has been misused by certain persons for declaring their unaccounted income as exempt
long-term capital gains from sale of shares by entering into sham transactions. Such practice is known in
common terms as penny-stock transactions.
With a view to prevent this abuse, the exemption under Sec 10(38) from long term capital gains in case
of transfer of listed shares was restricted through amendment by Finance Act, 2017, by imposing an
additional condition –
STT must have been paid at the time of acquisition of such shares in case of such shares
acquired after 1st October, 2004.
However, to protect the exemption for genuine cases where STT could not have been paid like acquisition of
shares in IPO, FPO, bonus or right issue by a listed company, acquisition by non-resident in accordance with
FDI policy of the Government etc., such acquisitions were notified as transactions not liable for STT.
FCA Ruchika Jain

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WHY TAX ON LTCG ? / MISCHIEF BEHIND NEW TAX PROVISIONS PROPOSED IN BUDGET, 2018
Extract of Speech of Hon’ble Finance Minister, Mr. Arun Jaitley
“Rationalisation of Long Term Capital Gains (LTCG)
155. Madam Speaker, currently, long term capital gains arising from transfer of listed equity
shares, units of equity oriented fund and unit of a business trust are exempt from tax. With the
reforms introduced by the Government and incentives given so far, the equity market has
become buoyant. The total amount of exempted capital gains from listed shares and
units is around ₹ 3,67,000 crores as per returns filed for A.Y.17-18. Major part of this gain
has accrued to corporates and LLPs. This has also created a bias against manufacturing,
leading to more business surpluses being invested in financial assets. The return on
investment in equity is already quite attractive even without tax exemption. There is
therefore a strong case for bringing long term capital gains from listed equities in the tax net.
However, recognising the fact that vibrant equity market is essential for economic growth, I
propose only a modest change in the present regime. I propose to tax such long term capital
gains exceeding ₹ 1 lakh at the rate of 10% without allowing the benefit of any
indexation. However, all gains up to 31st January, 2018 will be grandfathered.”
FCA Ruchika Jain

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WHY TAX ON LTCG? / MISCHIEF BEHIND NEW TAX PROVISIONS PROPOSED IN BUDGET, 2018….. Contd.
1. The equity market has become buoyant
2. Total amount of exempted capital gains from listed shares and units is around ₹ 3,67,000 crores.
Thus, it led to significant erosion in the tax base resulting in revenue loss
3. Major part of this gain has accrued to big corporates and LLPs, which do not require exemption.
Moreover, the prevailing MAT @ 18.5% applicable on LTCG does not affect the corporates much.
4. Exemption of capital gains has created a bias against manufacturing, leading to diversion of
investment in financial assets, rather than business funds being invested in more productive
channels. If funds invested in manufacturing, it would not only create new employment
opportunities but also add to GDP of the nation
5. Abusive use of tax arbitrage opportunities created by these exemptions
6. Equity is already quite attractive even without tax exemption. Equity normally yields handsome
returns of around 10% - 30%. Thus, 10 % tax on such long term capital gains doesn’t make it less lucrative.
Moreover, short term capital gains held for a period upto 12 months already attract 15% tax. Thus, 10% tax
on long term capital gains if held for a period say 12 months 1 day is not really burdensome.
7. Interest of Small investors well taken care of in Budget, 2018. Assuming rate of return of 10%,
investors with portfolio of ₹ 10 lakhs are out of purview of taxation of LTCG.
8. Alignment with taxes with many foreign countries for taxing capital gains
FCA Ruchika Jain

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PICTORIAL REPRESENTATION OF TAX ON CAPITAL GAINS POST- BUDGET, 2018
HIGHER OF
&
FCA Ruchika Jain
Transfer (sale) of Listed Equity Shares, Units of Equity Oriented Mutual funds, Units of business trust (if STT paid on transfer)
{in case of Equity Shares STT should be paid at the time of acquisition as well}
Held for a period
< = 12 months
Short Term Capital Gains
(i.e., Sale Value – Cost of
acquisition)
Continue to
be taxable @
15% u/s
111A
Held for a period
> 12 months
Long Term Capital Gains (LTCG)
(i.e., Sale Value – Cost of acquisition)
Acquired before
01.02.2018 & Sold on or
before 31.03.2018
Acquired on or before 31.01.2018
& sold after 31.3.2018
Acquired after 31.01.2018
& sold after 1 year
LTCG exempt u/s 10
(38)
Pre-budget provisions
applicable & New sec
112A does not apply
LTCG taxable under new sec 112A
▪ Taxable @ 10%
▪ on LTCG exceeding INR 1 lakh
▪ Cost to be taken without
indexation
GRANDFATHERING PROVISIONS
APPLY i.e., in broader terms no tax
on Capital Gains upto 31.01.2018.
Cost computed as under:
Grandfathering provisions
DO NOT apply
Actual cost of
acquisition
LOWER OF THESE 2:
FMV as on
31.1.2018
Sale
Value
LTCG taxable under new sec
112A
▪ Taxable @ 10%
▪ on LTCG exceeding INR 1 lakh
▪ Cost to be taken without
indexation

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LTCG shall be exempt u/s 10(38). Old provisions to continue to apply. New Sec 112A proposed in Budget, 2018 not
applicable.
Analysis 1 : The Long term Capital Gains 150 shall be exempt u/s 10(38)
Analysis 2 : Since, Long Term Capital Gains are exempt u/s 10(38). There shall be no treatment of
the Long Term Capital Losses. Such losses, cannot be set-off or carried forward &
set-off against any long term capital gains arising from other capital assets like
jewellery, property, paintings, etc.
Particulars Scenario 1 Scenario 2
Date of Acquisition 1.01.2017 1.01.2017
Cost of Acquisition 100 100
Date of Sale 15.03.2018 15.03.2018
Sale Value 250 50
Fair Market Value as on 31.01.2018 Not relevant Not relevant
Computation of Capital gains (A.Y. 2018-19)
Sale Value 250 50
Less: Cost of Acquisition 100 100
(Analysis 1) (Analysis 2)
Long Term Capital Gains 150 -50
ILLUSTRATION: Shares Acquired before 01.02.2018 and Sold on or before 31.03.2018
FCA Ruchika Jain

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Long Term Capital Gains taxable under new proposed Section 112A & grandfathering provisions apply
Particulars Scenario 1 Scenario 2 Scenario 3 Scenario 4
Date of Acquisition 1.01.2017 1.01.2017 1.01.2017 1.01.2017
Cost of Acquisition 100 100 100 100
Date of Sale 1.04.2018 1.04.2018 1.04.2018 1.04.2018
Sale Value 250 150 150 50
Fair Market Value as on
31.01.2018 200 200 50 200
Computation of Capital gains (A.Y. 2019-20)
Sale Value 250 150 150 50
Less: Cost of Acquisition 200 150 100 100
(Analysis 1) (Analysis 2) (Analysis 3) (Analysis 4)
Long Term Capital Gains 50 0 50 -50
ILLUSTRATION: Shares Acquired on or before 31.01.2018 and sold after 31.3.2018*
FCA Ruchika Jain
*Source: The figures for illustration has been taken from FAQ dt. 04.02.218 issued by CBDT with Author’s note in the
Analysis part

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Analysis 1 As the actual cost of acquisition (100) is less than FMV as on 31.01.2018 (200), therefore, cost
of acquisition shall be taken at 200. LTCG of 50 (250-200) taxable u/s 112A. No tax on Long Term
Capital Gains upto INR 1,00,000.
Analysis 2 In Scenario 2, actual cost of acquisition (100) is less than FMV as on 31.01.2018 (200). However,
the Sale Value is 150 which is less than the said FMV (200). Therefore, in such a case, if cost is
taken at 200 (lower of Cost or FMV), this will result in notional loss of 50 (150-200), which is clearly not
the intention of the legislature. The intention is only to grandfather all the capital gains upto 31.01.2018.
Thus, in such a situation, Sale Value 150 (which is less than FMV) shall be taken as Cost of
Acquisition & LTCG shall be Nil (150-150).
Analysis 3 In this case, Actual cost of acquisition (150) is more than FMV on 31.01.2018 (50), thus, actual
cost of acquisition shall be taken as cost. LTCG of 50 (150-100) taxable u/s 112A @ 10%. No tax on
Long Term Capital Gains upto INR 1,00,000
Analysis 4 In Scenario 4, Actual Cost of Acquisition (100) is less than FMV on 31.01.2018 (200). However,
Sale Value (50) is also less than FMV, therefore, the benefit of higher FMV on 31.01.2018 is not
required, as there are already losses. Thus, the actual cost of acquisition (100) shall be taken as
the cost of acquisition. This long term capital loss of 50 (50-100), can be set-off against any other
long term capital asset. Say: Sale of jewellery, property, paintings, etc. The unabsorbed portion of
long term capital loss shall be eligible for carry-forward as well, in accordance with the existing
provisions of the Act.
ILLUSTRATION: Shares Acquired on or before 31.01.2018 and sold after 31.3.2018…………(Contd.)
FCA Ruchika Jain

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Long Term Capital Gains taxable under Sec 112A & grandfathering provisions do not apply
Analysis 1 : LTCG of 150 (250-100) taxable u/s 112A @ 10%. However, there is no tax on Long Term
Capital Gains upto INR 1,00,000
Analysis 2 : This long term capital loss of 50 (50-100), can be set-off against any other long term capital
asset. Say: Sale of jewellery, property, paintings, etc. The unabsorbed portion of long term
capital loss shall be eligible for carry-forward as well, in accordance with the existing provisions
of the Act for set-off & carry-forward of long term losses.
Particulars Scenario 1 Scenario 2
Date of Acquisition 1.02.2018 1.02.2018
Cost of Acquisition 100 100
Date of Sale 15.03.2019 15.03.2019
Sale Value 250 50
Fair Market Value Not relevant Not relevant
Computation of Capital gains
Sale Value 250 50
Less: Cost of Acquisition 100 100
Analysis 1 Analysis 2
Long Term Capital Gains 150 -50
FCA Ruchika Jain
ILLUSTRATION: Shares Acquired after 31.01.2018

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CBDT has clarified the doubts over the manner of taxability of Capital gains post-budget 2018, by issuing FAQs
dated 4th February, 2018. The majority of issues addressed under FAQs, have already been covered through illustrations
above. To view the complete copy of FAQs click here
The main issues under FAQs are covered hereunder:
FAQ No. FAQ Reply to FAQ
Q 14 Whether tax will be deducted at
source in case of gains by resident
tax payer?
No. There will be no deduction of tax at source from the
payment of long-term capital gains to a resident tax payer.
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, at the
rates prescribed in Part-II of the First Schedule to the
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.
FAQs dated 4th February, 2018 issued by CBDT
FCA Ruchika Jain

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INSIDE THE BUDGET – LONG TERM CAPITAL GAIN RJSP & Associates
FAQ No. FAQ Reply to FAQ
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.
Q 17 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.
Q 21
&
Q 22
What will be the cost of
acquisition in the case of bonus
shares/right share acquired
before 1st February 2018?
The cost of acquisition of bonus shares / right 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 / right
shares as on 31st January, 2018 will be taken as cost of
acquisition (except in some typical situations explained in
Ans 7), and hence, the gains accrued upto 31st January,
2018 will continue to be exempt.
FAQs dated 4th February, 2018 issued by CBDT ……… (Contd.)
FCA Ruchika Jain

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The information in this document has been obtained or derived from sources believed by RJSP & Associates to be reliable but our firm does not represent that this information
is accurate or complete. Any opinions or estimates contained in this document represent the judgment of author at this time and are subject to change without notice. Readers
of this publication are advised to seek their own professional advice before taking any course of action or decision, for which they are entirely responsible, based on the
contents of this publication. Author neither accepts or assumes any responsibility or liability to any reader of this publication in respect of the information contained within it
or for any decisions readers may take or decide not to or fail to take. This document neither does nor shall be construed to an offer, invitation, solicitation of any kind.
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FCA RUCHIKA JAIN
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#Inside the budget 2018_Long Term Capital Gains

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